With the media frenzy surrounding the public listing of Elon Musk's SpaceX sizzling, there's a serious risk that investors piling into the world's largest IPO will get burned – especially the retail crowd.
In a typical large initial public offering, the percentage of shares allocated to "mom and pop" investors is no more than 10%, leaving large institutional players with the vast majority of newly listed shares.
This protects small investors as a launch can flop in the early days of trading, or be highly volatile in the weeks and months afterward. Big institutions typically have deep pockets, the capacity to withstand market volatility, and a reasonably high pain threshold for losses. The same cannot be said for the average retail investor.
But nothing is typical about the SpaceX IPO – and not just its record-breaking $1.75 trillion valuation. Retail investors are being allocated around 30% of the $75 billion of shares on offer. That leaves individuals much more exposed than usual to volatility and price weakness – both of which are highly likely.
Red Flags
It has never been easier for individuals to take part in a major IPO.
Brokerage firm Fidelity Investments recently took the unusual step of lowering its eligibility requirement for participating in an IPO from an account balance of $500,000 to just $2,000. Clients of Robinhood Markets, SoFi and E*Trade aren't required to hold a single cent in their accounts, while Charles Schwab demands a $100,000 minimum balance.
Small investors may be getting lured in. Retail flows tracker Vanda Research notes that the usual uptick in equity buying after US tax returns in April has been tepid, perhaps because some investors are raising liquidity ahead of the SpaceX IPO.
The track record for large, flashy tech IPOs should certainly give these retail punters some pause.
Sam Grelck, equity strategy analyst at Truist Advisory Services, has tracked 30 major tech-related IPOs over the past 15 years, and his findings suggest a significant drawdown within SpaceX's first year of trading is highly likely.
Shares in every one of those 30 companies suffered a significant double-digit decline within 12 months of the first-day close. Some drawdowns were as much as 90%, and the average was 55%. "Investors should be prepared for elevated volatility and the potential for significant drawdowns when participating in new listings," he advises.
That said, his findings also show that returns tend to be positive in the first three months following the IPO, even if performance is patchy. Returns over the six- and 12-month horizons tend to be negative, however.
In short, the ride is always bumpy.
Bold Assumptions
Will the SpaceX ride be any smoother? Some of the numbers underpinning the IPO suggest not. Analysts at Goldman Sachs , one of its underwriters, reckon the company's total revenue could grow to $474 billion by 2030 from $18.7 billion last year, with its AI segment posting a 100-fold revenue increase to $322 billion from $3.2 billion.
"By almost any reasonable metric, that's a bold assumption," says Ameriprise chief market strategist Anthony Saglimbene.
Meanwhile, analysts at Morgan Stanley, also an underwriter, have reportedly forecast total revenue hitting $3.4 trillion by 2040.
What's more, employees of companies launching an IPO usually have to wait six months before they can sell, but SpaceX has waived this requirement. Some analysts warn that employees and early investors could monetize their positions by dumping shares on unsuspecting retail investors shortly after listing.
Of course, a rush of selling from company insiders could be met with a wall of buying from individuals. But it might not be, meaning many retail investors could be left nursing big losses in a downdraft while more sophisticated shareholders exit early.
At the top?
On a broader scale, many analysts are warning that the mania surrounding the SpaceX IPO is a clear signal that the market top is here.
Not everyone agrees, of course. Noah Weisberger, chief US equity strategist at BCA Research, notes only about 20% of mega-IPOs coincide with market peaks.
But none of those previous mega-IPO waves can hold a candle to what we are about to see in the coming months, with SpaceX's monster IPO followed up by offerings from AI darlings OpenAI and Anthropic – both of which are expected to secure $1 trillion valuations.
If SpaceX is a success, retail interest in these other mega public listings will undoubtedly skyrocket. But if it crashes and burns, individuals who plowed their savings into the biggest IPO the world has ever seen will instead be looking for cover.
