SpaceX: Infinity and beyond?

SpaceX is going public, and the excitement is palpable. If the vertically integrated space company achieves its targeted $1.75 trillion valuation on Friday it will be the biggest initial public offering (IPO) in history, catapulting it to the 8th most valuable public company in the world (by unadjusted market capitalisation).

IPO fever is set to continue with the two poster children of the LLM boom, Anthropic and OpenAI, and a number of other sizeable growth-tilted private companies that will make their debuts in the months ahead. The timing is opportunistic: AI and technology-related sentiment remains (mostly) upbeat, valuations are generous and liquidity appears abundant.

Megacap IPOs are relatively unusual, with small, highly speculative companies most often seeking to raise money (the last significant IPOs was Saudi Aramco in 2019, followed by Alibaba in 2014). In aggregate, this cohort might account for 4-5% of the wider global equity market (on an unadjusted basis – see below). In addition to this, we will also see new equity issuance from already-quoted established businesses, such as Alphabet and Meta.

Naturally, this revival in stock issuance raises many questions around liquidity, sector leadership, valuations, and indexation. The latter point is particularly pertinent, with some index providers relaxing existing rules to accommodate new entrants more quickly than before.

SpaceX is undeniably unique. It is big, expensive and will largely be controlled by one person. Its commercial ambitions are unabashed, with an “addressable market of $28.5 trillion” according to its prospectus - the sky is no longer the limit it seems. While this view is likely shared by a sizeable cohort of loyal followers, the company is lossmaking (unlike many of its soon-to-be megacap peers) and will likely trade on an eye-watering 100x price-to-sales multiple. This implies some extreme assumptions about the long-term growth runway.

To support its lofty valuation ambitions only a small proportion of shares will be initially available for public trading. The $75bn that it is seeking to raise equates to a ‘free-float’ of ~5% of outstanding shares - many of its future peers have free-floats in the 80% to 100% range.

Such a small free-float, limiting the number of shares, may create some perceived scarcity, making demand likely to outpace supply (at least in the near-term). This effect may be amplified as benchmark-aware or passive strategies will also be obliged to own such investments – albeit at the expense of other stocks.

The rebalancing effect may be overstated, however. SpaceX’s initial index weight in the tech-heavy US Nasdaq, the index which will give it the highest weighting, will remain relatively modest to account for the restricted public float – perhaps close to 1.5%. That figure will eventually rise as early investors and employees are able to sell their shares after their initial lockups expire, but it will be gradual. Meanwhile, other benchmark providers are treading more carefully: MSCI has indicated a <0.1% global weight initially, while S&P has opted to stick with its existing rules (which will not include the stock at all, as they require the stock to be publicly available for at least 12-months and also profitable).

Combined rebalancing across the wider indices – which mechanically will impact the biggest stocks most – is relatively modest. Importantly, this rebalancing does not impact the index level, which is unchanged (though it doesn’t preclude the possibility that new capital may be attracted to indices overall). For each new stock which “must” be bought be trackers, something else “must” be sold as their weight falls.

From a liquidity standpoint, the market is a capable of absorbing this issuance without undue stress. The global (mostly US) stock market needs to absorb ~$500bn of issuance over the next twelve months, which equates to ~0.6% of the total value of the developed stock market, and is equivalent to less than half a year’s dividends and buybacks.

Of course, this still raises the broader questions about how passive is passive, when index providers are making big subjective adjustments to index weights. Nor does this address – or alter – the ongoing trend towards all things passive, which continues to lead equity market flows.

However, the jury is still out as to whether investor ‘herding’ via passive ETFs and index funds encourage larger price swings and exacerbates overall market volatility. At the stock level, while inclusion in an index seems likely to boost demand for that stock relative to others, finding material “inclusion” effects in the historic data is difficult. And once a stock is in the index, and the initial demand has been sated, further passive buying of the index cannot somehow be responsible for those stocks continuing to beat the index.

None of this means that, from our top-down vantage point, we embrace these debuts or the narrowness of this market’s recent advance. But so far at least we have been relatively unfazed by it – and as with so many other issues, we suspect it may be less important than the next few twists and turns in the business cycle. Indeed, if economic growth does continue to show signs of resilience, the cycle may yet deliver a broader advance.

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