Musk’s $1.8 trillion SpaceX IPO could be ‘highly undesirable’ for some

SpaceX is expected to debut on the United States’ public markets on Friday in what will be the largest initial public offering (IPOs).

Artificial intelligence (AI) giants OpenAI and Anthropic are also widely expected to go public soon, and thanks to a new rule change by tech stock exchange Nasdaq, individual investors could own stock of these companies when they go public in as soon as 15 business days following its first trading day.

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SpaceX is valued at nearly $1.8 trillion, or $135 per share, surpassing Saudi Aramco, which debuted in 2019 at $1.7 trillion at what had so far been the biggest IPO.

SpaceX’s IPO is generating buzz among retail investors. The Elon Musk-led company is expected to allocate 20 percent of shares to retail investors and has drawn roughly $70bn in orders, according to the Reuters news agency.

Historically, there is a waiting period between when a company goes public and when it is listed on the Nasdaq-100 index and/or S&P 500. Companies typically must demonstrate profitability over the previous four quarters for the S&P 500 and three calendar months for the Nasdaq-100, excluding the month of listing. SpaceX lobbied for a waiver for so-called mega cap companies.

Musk’s efforts returned mixed results. In early May, Nasdaq made a rule change that could allow the Texas-based company to enter the index after just 15 trading days. S&P Dow Jones Indices, which runs the S&P 500 index, did not change its rules.

Buying in

While there has been a lot of excitement for this IPO and it is oversubscribed at a rate of up to four times its planned offering as per US media reports, there are also concerns that it may be highly overvalued and that could expose especially retired investors who put their life savings in pension funds and don’t have a say in stocks that are chosen.

Analysts at MorningStar, for instance, have valued SpaceX at $63 a share, a 53 percent discount to the upcoming IPO price.

On Wednesday, North Carolina state’s treasurer said that it would not buy a direct stake for the state’s pension fund for teachers, firefighters and police officers because it was too expensive, but would invest through the larger index funds it invests in.

“We will ultimately participate in SpaceX through our index positions in our public equity,” Treasurer Brad Briner told the news outlet CNBC.

Pension fund investments are tied to index funds pegged to the performance of stocks in the S&P 500 and others in the Nasdaq-100, among others. That means that consumers who have a pension, they may not have a choice to opt in or opt out.

Essentially, the seasoning period allows companies to prove that the stock is not overvalued, providing a buffer to investors who may own index funds on behalf of their clients.

“They have to buy the stocks that are in the index in proportion to their weighting within the index. As a result, they will all be forced to buy these companies immediately, and that could be highly undesirable,” Aleksander Tomic, associate dean for strategy, innovation and technology at Boston College, told Al Jazeera.

Excluding a single company would require creating an entirely new fund.

“If SpaceX enters the Nasdaq, these fund managers can’t simply choose not to track it because they are contractually obligated to follow the index,” Colin Clark, lead adviser and director of business analytics at Northwestern Mutual, told Al Jazeera.

“If you want to attribute it to anything, it is the platform itself, where the Nasdaq may be bending the rules to allow a sooner-than-normal entry into the index system,” Clark adds.

These changes also set the stage for the looming OpenAI and Anthropic IPOs.

On Monday, OpenAI confidentially filed its IPO. While the AI giant did not disclose the terms of the deal, it has been widely reported that it is aiming for a $1 trillion valuation. Earlier this month, Anthropic also confidently filed its IPO for undisclosed terms. Like OpenAI, it is expected to be valued at about $1 trillion.

Governance strategy qualms

As part of the looming IPO, SpaceX outlined how the company will be governed. That has raised concerns among state-level fund managers who run pension funds.

Under the new policy, SpaceX would give Musk outsized control and weaken board accountability. In theory, boards can remove chief executives. But under the proposed structure, Musk would control as much as 85 percent of voting power despite owning 42 percent of equity.

“Removal of the Company’s most powerful officer would, as a mathematical matter, require his own vote – essentially making him unfireable without his own consent,” a letter authored by Thomas DiNapoli, New York State comptroller; Mark Levine, New York City comptroller; and Marcie Frost, CEO of the California Public Employees’ Retirement System, said in May.

“This level of insulation from accountability is virtually unheard of among any other large US issuer whose governing documents foreclose accountability to public owners on these terms.”

This governance structure will limit shareholders’ ability to have a say in the company.

But this governance strategy means that it will be very difficult for the board to remove Musk if necessary, a plan that Tesla explored, the Wall Street Journal reported last year. The electric carmaker denied the reports.

That means shareholders, including institutional investors that hold funds on behalf of both individual investors and larger pension funds, will be unable to remove him if he fails to deliver on promises.

Tomic of Boston College warns that SpaceX, and potentially OpenAI and Anthropic, may be significantly overvalued. If their valuations fail to hold, especially given the newly waived Nasdaq rules, it raises concerns about potential losses for pension funds, individual retirement accounts, and university endowments, among others.

“What’s particularly problematic is the 15-day rule because there isn’t enough time to see how an IPO will perform,” Tomic said.

SpaceX also has direct exposure to university endowments. The University of North Carolina system, for example, has 10 percent of its endowment tied to SpaceX, according to The Wall Street Journal, as do both Washington University in St Louis and Stanford University in Palo Alto.

The Musk bet

Musk has also made ambitious, forward-looking promises for SpaceX in the coming years, including large-scale bets on the future of AI, such as plans to build data centres in space. But those promises are overshadowed by Musk’s longstanding history of overpromising and under-delivering.

A New York Times analysis found he has delivered on promises on time, if at all, only on 19 percent of roughly 600 commitments he has made.

In 2016, he claimed humans would be on Mars by 2025. That did not happen. He also failed to deliver on his 2025 promise that Tesla’s robotaxi would be fully autonomous by the end of the year. And most ambitiously, while leading the Department of Government Efficiency, he promised $2 trillion in budget cuts. That also did not materialise.

SpaceX reported a $4.9bn loss last year and revenue of $18bn, up from $14bn the year before.

Much of the growth is driven by the rapidly growing Starlink satellite network.

“When we drive a car, we look out the windshield, not the rearview mirror, so if you’re an institutional manager like we are, you look forward and ask what the company could earn. We tend to be very long-term investors,” Michael Monaghan, partner portfolio manager at FounderETFs, told Al Jazeera.

“For a name like SpaceX, we’re looking at at least two or three years ahead. We ask what SpaceX could do in 2030 without stretching ourselves. We think they can do $50bn in Starlink and $50bn in defence [in revenue].”

Starlink has more than 10 million subscribers and is a profitable part of the company. It is growing and represents somewhere between 50 to 80 percent of its revenue.

SpaceX launches rockets faster than any space programme ever has, with rocket launches nearly every two days. The Falcon-9 in particular completed 165 launches last year alone.

Monaghan also said that the company is well-positioned to build a moonbase, which is a priority of the US Department of Defense.

“There’s only one company that can build, deliver, and supply that,” he said.

Morgan Stanley and Goldman Sachs echo Monaghan’s position. Morgan Stanley reportedly expects that by 2030 revenue could top $330bn, and Goldman says $470bn over the same time period.

A ripple effect

But as SpaceX doubles down on bets to build data centres in space, there are worries that the AI sector is a bubble that could burst.

“There are a lot of potential valuations in a space company, especially as we learn more about space and resource constraints alongside increasing compute demand, so that part is more open to interpretation,” Clark said.

Because of the AI sector’s tight interconnections, weak performance could drag down multiple stocks at once – and by extension, the broader market amid growing concerns about an AI bubble.

“On one hand, whoever wants exposure to AI will be able to get that exposure by buying this company’s stock. Having said that, for better or worse, there are some serious considerations … that a bubble is forming, and it may not be a good time to be exposed to AI,” Tomic said.

If that bubble does burst, that impacts companies down the line, and consumers don’t have a choice if this is a risk they want to take.

“The difference between the IT bubble in the 1990s and the AI bubble today is that the top 10 companies in the S&P 500 today are more overvalued than they were in the 1990s,” Torsten Slok, Apollo Global Management’s chief economist, said in a note last year.

Among them are Nvidia, which has major investments and partnerships with OpenAI, SpaceX and Anthropic. Microsoft, which invested in OpenAI, also earlier this year announced a partnership with SpaceX’s Starlink.

The top 10 holdings in the index – all tech companies except for Berkshire Hathaway Inc – represent more than 40 percent of the index’s weight. That is even before SpaceX, OpenAI or Anthropic enter the index.