The pursuit of hot initial public offerings carries significant, often overlooked, risks. It's easy to get caught up in the excitement and skip the fine print.
The stock of SpaceX (SPCX) has fallen below its IPO price, presenting a crucial lesson for investors. With the shares now trading under the company's initial offering price, the question arises: is buying the dip now too risky?
Not long ago, a guest at a dinner described the extraordinary lengths they went to in an attempt to acquire SpaceX stock before its public debut. They searched for venture funds holding the company, sought out former employees willing to sell, explored secondary markets trading shares at staggering premiums, attempted to join syndicate investments, and inquired with custodians about any avenue to access shares at the IPO. Each path ended in a dead end or a price tag that gave them pause.
Eventually, SpaceX did go public.
Now, in an ironic twist, after expending immense effort trying to get in before the IPO, this individual faces a completely different dilemma with the stock below its offer price: is the risk of buying the dip now too great?
This is a question I've been asked countless times. Each time, it brings to mind the story of Google.
Every era has its wealth-generating engines. Railroads, oil, automobiles, electricity, the internet, cloud computing, artificial intelligence. Each has reshaped the economy, created new fortunes, and forced families, advisors, markets, and institutions to adapt. When Google (now Alphabet Inc, tickers GOOG, GOOGL) went public in August 2004 at $85 per share, many astute observers questioned its business. An internet search engine? Surely it couldn't be worth that valuation.
We all know how that story ended.
Today, the names have changed. They are Anthropic, OpenAI, Stripe, Databricks. These are the leaders of a new generation of exceptional private companies coveted by many investors. And the conversation feels strikingly familiar. Was Google too expensive at $85? Was Amazon.com Inc (AMZN) too expensive after it doubled? Was NVIDIA Corp (NVDA) too expensive after it quadrupled?
My first mentor explained to me how investors experience bull markets. In the first bull market, you don't know enough to act effectively. By the time the second one arrives, you don't have enough capital, which pressures you to go all-in during the third to better position yourself for the long term. We've seen this pattern play out with International Business Machines Corp (IBM), Apple Inc (AAPL), Microsoft Corp (MSFT), Amazon, Google, and NVIDIA. Could SpaceX be next?
Before answering, consider another list.
Sun Microsystems once powered the backbone of the internet and gave the world Java. At its peak, it was valued at $200 billion. Ultimately, Oracle Corp (ORCL) acquired Sun's remains for $7.4 billion. Lucent Technologies was the crown jewel of Bell Labs and one of America's most admired tech companies. Its stock fell 99% during the dot-com bust. These were not obscure firms. They were the SpaceX, Anthropic, and OpenAI of their day. Everyone knew their names, and everyone wanted in.
Hype and quality are not the same, and the public markets have a way of distinguishing between them.
The lesson is not that great companies fail. The lesson is that hype and quality are not synonymous, and the public markets have a mechanism for separating the two.
It's also noteworthy that for many era-defining, benchmark companies, a significant portion of wealth creation occurred before they entered the public markets. Companies today stay private longer. By the time they IPO, much of the early value creation may have already happened. An IPO is no longer a starting line. Sometimes, it's a scoreboard lighting up after years of compounding in the private markets.
With Anthropic and OpenAI also expected to go public amid similar market fervor, history provides reasons for humility. Data shows many IPOs underperform the broader market for up to two and a half years as initial enthusiasm wanes and insider selling increases market supply. Governance complexities, lofty valuations, and the gap between narrative and profitability deserve careful scrutiny before the roadshow hype takes over.
This does not mean these companies cannot be potential outliers that may achieve success comparable to Alphabet or Amazon over time. The AI opportunity is significant. However, the fear of missing out (FOMO) often leads investors to skip reading the prospectus.
Another consideration is that waiting for a perfect entry point could mean missing a potential outlier entirely.
Behavioral finance has a term for this: loss aversion. We fear making a mistake more than we fear missing an opportunity. We remember buying something that later fell in price but rarely calculate the cost of never having bought Amazon, Alphabet, or Apple.
If you believe a company has the potential to become many times larger than it is today, your entry price may be far less important than your willingness to be an owner.
As someone trained in long-term investing, I do not chase headlines or hot IPOs. My focus is on building diversified portfolios designed for wealth compounding over decades. People can create wealth through concentration, but they preserve it through diversification. Yet, when a client is convinced a company belongs in their long-term portfolio, I often return to a surprisingly simple idea: if you believe the company has the potential to become many times larger, your entry price may matter far less than your resolve to be a long-term owner.
Ironically, investors scrambled to accumulate SpaceX stock before its IPO. Now that it's public, volatility has arrived as index funds buy in and lock-up expirations push more shares onto the market. The same dynamics await Anthropic and OpenAI, with governance questions and the high valuations demanding flawless execution likely amplifying the swings.
None of this means you should avoid these stocks. It means you should enter with your eyes wide open. Long-term investing is never about predicting the perfect price. It's about holding exceptional businesses for the long run and letting time, not timing, play the leading role.
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