SpaceX IPO: what you need to know

In one of the most keenly anticipated stock market events in years, SpaceX is about to float on the Nasdaq exchange. Investors may be wondering what it all means and whether they can – or should – take part. The following Q&A aims to answer their questions.

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What exactly is happening at SpaceX?

The company – Elon Musk’s space exploration venture – is about to make its shares available for anyone to buy on the stock market. In other words, it is about to become ‘listed’, via a ‘flotation’ or ‘initial public offering’ (IPO). Currently SpaceX is a ‘private’ company, so ownership of its shares is restricted to people connected to the company, such as Mr Musk, and a small group of outside investors.

SpaceX’s flotation on New York’s Nasdaq stock exchange is expected to take place on Friday.

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Why is SpaceX attracting so much attention from investors?

In the first place, Mr Musk is already the richest person in the world, a famous if sometimes controversial figure and one of history’s most successful entrepreneurs, while SpaceX’s IPO is expected to confirm his status as the world’s first trillionaire. Naturally, some investors are keen to take the opportunity to share in the fortunes of his space company.

Secondly, SpaceX itself is expected to join a tiny group of businesses worth more than $1 trillion, alongside the likes of Nvidia, Amazon and Microsoft. In fact, the company hopes for a valuation of about $1.8 trillion when it floats.

A flotation is a more complicated process than it may appear. There are two aspects to it. First, the company issues new shares and offers them to investors at a price that it determines. Existing shareholders may also sell some of their shares at the same price (very occasionally, no new shares are created). Second, the shares are made available on the stock market and anyone can now buy them – but at the market price, in what is termed ‘secondary trading’, by contrast with the ‘initial’ offer when shares are bought from the company or from existing shareholders at the price set by the company.

Incidentally, you may have heard the figure of $75bn in connection with the float and wondered how it relates to the headline SpaceX valuation of about $1.8 trillion. The first figure is the value of the new shares being sold – in other words, how much money the company will raise in the IPO – while the second is the expected valuation of the entire company at flotation.

Can I buy SpaceX shares?

Thanks to the two-stage nature of IPOs just described, investors will in fact have two distinct ways to buy SpaceX shares this week (and further ways to own them indirectly, as we will explain).

The first is to take part in the flotation itself, in other words to buy the shares being offered by the company (or by existing shareholders) at the price determined by SpaceX. Some investment platforms and brokers, although not Fidelity International, offer this option.

The second is to wait until the IPO has taken place and then buy the shares just as you would any other. This way, you pay the price set by the market, which fluctuates from minute to minute.

The share price of a newly floated company often rises immediately after its IPO, but this is not a foregone conclusion. SpaceX shares should be available to buy and sell on Fidelity International’s platform shortly after the flotation.

Our policy is as follows: ‘We do not currently support IPO participation on our platform, so clients will not be able to participate in the upcoming SpaceX IPO at launch. Once trading begins on the secondary market, we expect the shares to be available to clients in the usual way, subject to CDI availability within CREST.’ A CDI is a ‘CREST depository interest’, a means by which foreign shares are made available to British savers. At present, American stocks in CDI form can be held on the Fidelity platform in general investment accounts or ISAs.

How can I judge SpaceX’s valuation?

The company is currently loss-making, so we cannot use the most common yardstick of valuation, the price-to-earnings ratio. In the case of a loss-making business, analysts often use the ‘price-to-sales’ ratio instead.

Based on expected annual revenues of around $18bn and a flotation valuation of roughly $1.8 trillion, investors are valuing SpaceX at about 100 times annual sales. This is high by most standards: Nvidia is valued at 21.5 times revenues, Microsoft at 12.3 times and Apple at 6.8 times. On the other hand, some commentators expect SpaceX’s sales to grow very quickly. For example, Goldman Sachs, one of the investment banks involved in the flotation, said it expected the company’s sales to grow 100-fold by 2030, according to a report in the Financial Times.

Independent analysts at Morningstar, the investment research firm, said they judged SpaceX to be worth $780bn. They said: ‘We think the company has been significantly overvalued and investors will have opportunities to buy the stock at more attractive levels after the IPO.’

What are the risks?

If Morningstar is right, there is the possibility that the share price will fall after flotation, even if SpaceX as a business, as opposed to as an investment, performs well. But there are risks to the business too.

An obvious one is how central Mr Musk is to SpaceX. Known in the City as ‘key man risk’, this refers to the dangers to a business of concentration of entrepreneurial drive, technical excellence or the ability to motivate others in one individual, who could, for example, fall ill, lose interest or simply take poor decisions that others are unable to challenge. This last risk is perhaps more acute in the case of SpaceX because Mr Musk will have, via a special class of share, more voting power than his percentage stake in the business would normally confer.

Space exploration and launching rockets are also inherently risky businesses. Accidents, launch failures or delays could damage SpaceX’s reputation and finances.

Other risks are that the American government, a big customer of SpaceX, cools on its space programme, that competitors take some of the company’s business or put pressure on its margins, or that stock market sentiment swings away from giant tech stocks. Rising interest rates, which are possible, tend to hit growth stocks such as SpaceX disproportionately hard.

Are there other ways to get SpaceX exposure?

Yes. As we wrote in an earlier article, The funds that already invest in SpaceX, a number of British investment trusts have stakes, sometimes very large ones, in Mr Musk’s space company. Here they are, listed in order of percentage exposure to SpaceX (some figures have increased since we published the earlier article):

• Edinburgh Worldwide 22%
• Scottish Mortgage 21%
• Baillie Gifford US Growth 16.5%
• Schiehallion Fund 14.5%
• RIT Capital Partners 2.5%
• Monks 2.4%

Source: Association of Investment Companies, 9 June. Trusts with exposure of less than 1% omitted

There are also fund options for investors who would prefer more diversified exposure to the space industry, rather than just SpaceX. A London-listed investment trust called Seraphim Space is devoted to investing in space-related assets; it calls itself ‘the world’s first and only publicly listed investment vehicle focused exclusively on spacetech’.

Shares in the trust, which largely invests in unlisted companies, have risen by 55.8% so far this year, although the share price has been very volatile. Please remember also that past performance is not a reliable indicator of future returns.

An exchange-traded fund (ETF) could not invest in unlisted firms in the way Seraphim Space does because ETFs are ‘open-ended’ – they shrink and grow, in response to demand, by buying and selling shares in their holdings. Unlisted stocks cannot be sold at will, so ETFs hold quoted companies.

One, the VanEck Space Innovators ETF, has among its largest holdings Rocket Lab Corp, a satellite launch company, Planet Labs, which provides satellite imaging, and Viasat, a satellite broadband firm. All three are listed in New York. Shares in the ETF have risen by 63.4% over the year to date, although they too have had a bumpy ride.

What if I want to invest in US stocks but avoid SpaceX?

Some investors may want to avoid SpaceX over fears that it is overvalued or in view of the other risks detailed above. They may also worry that any US or global tracker fund will automatically have appreciable exposure to the company by virtue of its size.

In fact there will be ways to avoid it. Standard & Poor’s, the company behind the S&P 500 index, has said SpaceX will not qualify for inclusion in that index because it is loss-making and because not enough of its shares are being made available to outside investors on the stock market. Its shares will therefore not be included in S&P 500 tracker funds for now, although they could be admitted to the index in future. SpaceX is not barred from immediate entry into all S&P indices, however.

The Nasdaq exchange has taken a different approach and will allow SpaceX to join its Nasdaq 100 index. Nasdaq 100 index funds will therefore be forced to buy a sizeable portion of publicly available SpaceX shares when the company joins that index.

When it comes to actively managed funds, the managers will of course decide if and to what degree they want exposure to SpaceX. It’s noticeable that certain funds that have significant holdings in other technology stocks have avoided Tesla, Mr Musk’s other company, at least within their top 10 holdings. Examples include Polar Capital Technology Trust, Polar Capital Global Technology Fund, Allianz Technology Trust, JPMorgan Global Growth & Income Investment Trust and Blue Whale Growth Fund.

Stephen Yiu, who runs Blue Whale Growth, has never owned Tesla and is avoiding SpaceX too. ‘We would rather pay a reasonable price for highly profitable companies today than pay a significant premium in the hope that it [SpaceX] will prove successful,’ he told Fidelity.

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Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Shares in the investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.