In June, headlines abounded about rocket maker/Starlink internet provider/X (formerly twitter)/artificial intelligence company SpaceX being the largest IPO (initial public offering of stock) in history. Hype abounded as well when trading of the company’s stock began at $150/share and quickly skyrocketed to over $225/share. This was the first time in the almost 20 years I’ve been in the financial advising business that I received multiple calls about a stock IPO and what I thought about it.
Since the initial hype fest, things have not gone so well with the stock losing over 40% of its value over the course of only a month. It is very common for companies that become newly publicly traded and available to purchase in the stock market to experience wild swings as well as subpar shorter term results. Of the 6 largest IPOs before SpaceX, only 1 (oil producer Saudi Aramco) was up in value 1 year later and the amount it was up was minimal. The rest were all down with the majority being significantly down.
Newly listed stocks struggling isn’t limited to ultra large companies. Data spanning 46 years compiled by University of Florida finance professor Jay Ritter showed that over 56% of all companies are underwater 3 years after their stock market debut.
Does this mean SpaceX is doomed? Certainly not, but there are reasons to be concerned that SpaceX stock may continue to struggle. For one, the fact that only 4% of all shares of the company are currently being traded in the stock market and another 20% could start being sold this month when an insider sell window unlocks is one. Stocks go down in value when sellers outnumber buyers and the potential flooding of the market with shares after this window opens will require a lot more buyers for the price to increase or not fall further. Of course, Meta (formerly Facebook) famously dropped over 50% in a short time period after its IPO in 2012 only to be up over 400% 3 years later and up over 1,600% today.
The point is that no one knows what is going to happen next and you should not base your investing decisions on hype or trying to make a quick buck. When you try to make make money based on hype, you’re gambling rather than investing. The thing about gambling is the more and longer you do it, the more likely you are to lose. On the other hand, you’re more likely to gain the longer and more you invest.
One of the reasons for a company to IPO, besides raising money, is to open an opportunity for early investors, early employees, and founders to finally cash out their stock. At least 2 more large AI companies are expected to IPO this year. Be cautious about being the person they’re cashing out to by buying the stock shares of these companies, especially early on. Any investment decision should be based on whether it helps better accomplish your financial goals and plan, not hype. Hype and mania (dating all the way back to the Tulip Bulb Mania in the 1600s where a single tulip bulb became worth 5 times the cost of the average house) usually end with a few people getting very rich and most losing big.
If you’d like help creating a plan and portfolio that avoids hype and is optimized for your goals and situation, call 785-330-9292 or fill out the form below to schedule a complimentary strategy session with a financial advisor in Lawrence, KS on our team at Retirement Portfolios.
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