IPOs often come with great stories, optimism and tons of media coverage
Dear Dan,
I’m pretty excited that SpaceX is going public. Can I get in on it before the IPO?
Dazzled in Daytona Beach
Dear Dazzled,
As with many highly anticipated IPOs in the past, I am getting some version of this question a lot lately.
I happen to live and work in Melbourne, Fla. Our area code is 321 — like a countdown. I watch rocket launches from my front yard every week. Many of my clients, neighbors and friends work for SpaceX and other aerospace firms. It is an exciting business here on the Space Coast.
A lot of people believe that once SpaceX shares are available to the public, the price will soar like a Falcon 9 rocket. That may happen. But it doesn’t mean you will make any money if you get in before the IPO — or if you buy shares once they are publicly traded if you don’t get a pre-IPO interest.
There’s a lot of attention being paid to private companies right now. The Fundrise Innovation Fund , which has exposure to companies such as Anthropic, OpenAI and SpaceX, saw its valuation soar in the days after its New York Stock Exchange debut earlier this year. The Destiny Tech100, another fund that holds stakes in private assets, including SpaceX and Anthropic, has soared in recent days along with interest in SpaceX’s public debut.
I need to pause here to point out that hype and urgency are key ingredients in frauds. With every highly publicized IPO, there will be scams aimed at getting unsuspecting outsiders “in” on the IPO before its first day of trading. Be highly skeptical of such offers.
One thing to always keep in mind is that you cannot buy anything unless someone is willing to sell. From time to time, SpaceX has sold shares to various parties in private transactions. These parties took on the risk of providing SpaceX with capital.
Space is a risky business. At this juncture, it will be difficult to find current shareholders willing to make their shares available at a price significantly below the price at which shares will be offered to the public. It is simply not in their interest to do so.
Even if you could get in now, you might not profit, even if the stock “pops,” or sells for substantially more than the offer price, on opening day. As an insider, you would be subject to a lockup period of, typically, six months, during which you, other insiders and employees cannot sell shares. After that period, the stock could be up, or it could have joined the very long list of companies whose opening-day pop didn’t last.
The alternative to getting in pre-IPO is buying shares once they are public. If your intent is to get in fast and make a quick buck on a first-day pop, you aren’t really investing. You are speculating. If demand is high and there is a pop, it is unlikely you will get shares at the offer price. Prices move fast on the open market.
Whenever there is a pop, there tends to be criticism that the offer price was too low and the newly public company left money on the table. This fuels the idea that getting in early is getting in on a deal.
Research from Zoran Filipović and Biljana Seistrajkova titled “Beyond the hype: Understanding IPO (over)valuation” suggests that an opening pop reflects media attention and hype more than poor pricing. For the 848 U.S. IPOs over the course of 10 years that the study covered, the median return after six months was a loss of more than 5%.
You should also know that first-day action is not a great predictor of how a stock will do over the long term. Decades of research by Jay Ritter at the University of Florida shows that most IPOs underperform similar-size companies and the market at large by several percentage points over the long term on an annualized basis. Your return is based on the price you pay. Buy high after an early pop and your results can suffer.
That’s not to say you shouldn’t buy any SpaceX stock. Fans of SpaceX and Elon Musk will tell you that you would be crazy to not load up. They may be right. Just remember, the fans of all those other IPOs thought the same thing, and for all but a few, it wasn’t nearly as lucrative as they thought it would be.
If you want to buy some shares, go ahead. Just have realistic expectations about what rushing in will get you. Be sensible. No matter what you are thinking of buying as an investment, always consider what could happen to your finances if things don’t go well. Don’t bet your life savings on it.
IPOs often come with great stories, optimism about what is possible and tons of media coverage. That’s a cocktail that most people will be better off downing in moderation. Try to keep in mind the adage that “IPO” often stands for “it’s probably overpriced.”
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Originally published on MarketWatch. Read the original article here.