An expiring lockup will make more than 900 million shares available for sale after earnings. There are some better long-term investments.
Don't chase a SpaceX stock rally even if earnings are excellent, as a wave of shares will become available for sale.
When I warned investors against buying SpaceX stock after its initial public offering, the response was predictably hostile.
SpaceX is one of the most important companies in the world. Elon Musk has repeatedly accomplished things that skeptics considered impossible. And after waiting years for access, investors finally had a chance to own the company.
All of that was true. It still did not make the stock a good investment.
After soaring to close 49.5% above the IPO price on its third day of trading, SpaceX shares $(SPCX)$ are now down nearly 50% from the post-IPO closing price of $201.80, but investors shouldn't assume that decline automatically creates a half-off sale.
The stock's biggest test may still be ahead as a wave of share unlocks are to begin.
See my list of 14 stocks that are better long-term investments than SpaceX.
Only 5% of SpaceX shares trade
SpaceX sold approximately 639 million shares to the public through its IPO and as the underwriters fully exercised their overallotment options. That represents only about 5% of the company's outstanding stock.
That tiny float helped create artificial scarcity after the IPO. Millions of investors wanted the stock, but relatively few shares were available to satisfy that demand. Despite that favorable share structure, the stock has still lost half its value.
And that supply picture becomes much less favorable after SpaceX reports earnings on Tuesday.
On the second full trading day after earnings are released, up to 20% of the shares covered by SpaceX's standard 180-day lockup can become eligible for sale. That could release approximately 911.5 million shares, valued at more than $100 billion at recent prices.
And the supply keeps coming after that, as another 7% of the lockup pool becomes eligible around Aug. 21, followed by another 7% around Sept. 10. Additional releases continue through December.
That doesn't mean every SpaceX shareholder whose stock unlocks will sell. But that much new supply, and worries over potential sales, could push SpaceX's share price even lower.
Basically, real price discovery could start Aug. 6.
A 50% drop is normal for a hot IPO
SpaceX's collapse might look extraordinary. Historically, it is surprisingly normal.
Data compiled by Truist showed that large IPOs experienced an average maximum drawdown of 55% during their first year as public companies. Facebook, now Meta Platforms (META); Uber Technologies (UBER); CrowdStrike Holdings (CRWD); Palantir Technologies (PLTR); Coinbase Global (COIN); and many other eventual winners suffered brutal declines after their debuts.
Some became incredible investments later, the operative word being "later."
Apollo's latest research provides an even more sobering picture. Every annual IPO cohort from 2019 through 2024 underperformed the broader market over the following three years, based on the available measurement periods.
Apollo attributes that weakness to rich offering valuations, higher interest rates and a public market increasingly dominated by a handful of profitable megacapitalization companies.
There are also structural reasons IPO investors keep getting burned.
Companies stay private much longer than they once did. Venture-capital firms, sovereign-wealth funds and private investors now capture years of growth before a company ever needs public capital. By the time individual investors get access, the story has been polished, excitement is peaking, and the private market valuation has been pushed far higher than what the public market will tolerate.
Early investors already made the easy money. And an IPO gives them a way to cash out, and retail investors are often used as their exit liquidity.
Earnings won't eliminate supply risk
SpaceX could report excellent results Tuesday. Revenue may beat expectations, Starlink may continue growing and management may offer another exciting vision involving launches, satellites, and space-based computing. The stock could rally sharply.
But a strong quarter would not eliminate the coming supply. In fact, the earnings report is the event that triggers the first major unlock.
That's why I would not chase an earnings bounce.
I recently published a broader list of 14 long-term stocks I would rather own in my Substack, Let's Analyze. These are companies with clearer operating histories, proven economics, and market structures that aren't being distorted by an unusually small float.
SpaceX may eventually join that list. I am far from an "Elon hater" and have owned Tesla's stock TSLA for many years. But for now, the plan I laid out remains unchanged: let the company report for several quarters, allow the lockups to expire and give the stock six to nine months to establish a real trading history.
A great company can still be a terrible stock at the wrong price. And even after falling 50%, SpaceX still is not a buy.
-Robert Ross
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