SpaceX - Buyer Beware

The average investor was excluded from the explosive upside when SpaceX was a private company. That upside was reaped by “accredited” investors The average investor is largely excluded from the IPO allotment - a few crumbs were thrown. Now, the average investor is faced with investing at $170. Academic studies show that the long-term returns of IPOs in excess of reasonable benchmarks like the S&P are modest - or non-existent.

Transcript

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Welcome to a special episode of Through the Noise. And I'm up solo today because Robert is traveling, but I really wanted to do an episode today, given this day is historic. June 12th, 2026 is SpaceX Day. And I know it's in the news, a lot of hype, but this is very important. We know this is a large IPO, but it's not really appreciated that the size of this IPO is greater than the sum of all of the IPOs over the last four years. So this is very large. This company has been around for 24 years, so it's not a new company. So it's got an established track record. And it's also extraordinary that it will debut in the total market capitalization, will put it at perhaps the number seventh largest company. So this is a big deal. But what I want to focus on today are the implications for the average investor. So the average investor, just like the institutional investor, wants a diversified portfolio. And the demand for this IPO makes sense because this is a very large company, and to exclude it from your portfolio, you risk having an undiversified portfolio. So let's go through the mechanics. And I'll draw upon historical analysis of IPOs to kind of inform our analysis of SpaceX's IPO. So we know that the allotment price was set at $135. So I went to my online broker and requested 10 shares of SpaceX. Indeed, it was a little complicated because of my outside work with research affiliates. So we applied for an educational exemption so that I could go in and experience this allotment process. So I asked for 10 shares, and this morning I was informed that I got one. So 10% was actually filled. So this is important, and let me again stress the mechanics. So historically, when we look at IPOs, there is a pop on the first day. And this is referred to as the underpricing of IPOs. And the idea is simple that the company offers the shares relatively cheaply to make sure that all the shares are actually sold. So there's no uncertainty. So we often see an increase in the price. So at the time of shooting, SpaceX is not quite ready for trading on NASDAQ. It's midday. But we can see what's happening elsewhere. We have derivatives markets like Hyperliquid that trades perpetual futures. And this is not a niche market. So there, SpaceX Perpetual Futures has traded almost a half a billion dollars of value over the last 24 hours. And we can see the price is well above the 135. Indeed, the last time I checked, it was about 170. And this is consistent with this pop on the first day or the so-called IPO underpricing. That's number one. So uh to be clear, I benefit from that pop, but only for one share. The other nine I have to buy at a much higher price. So the second insight from the academic research is that the performance of these IPOs in the long term is not very impressive. So we define performance as you buy at the close of the first day and hold the stock for three years and then look at the historical returns. And let's be careful here because in the media there's stories that go something like this: only 20% of IPOs have negative returns over a three-year period. So the absolute return is not the benchmark. The benchmark should be an alternative like the S P 500. So, really what you're interested in is if you're buying at the close on the first day, what is the chance that your investment in the IPO does better than some benchmark investment like the SP 500? That's the metric, because the S P 500 is available as an alternative. And it turns out that those returns in excess of the SP 500 are very modest. Indeed, if you adjust those excess returns and then perhaps look at larger IPOs, which are uh closer to the SpaceX uh IPO, the excess return is close to zero. So this is the historical analysis, and obviously some IPOs do very well, some do poorly, but it's important to keep in mind. And we should keep this in mind because of the next insight. So there is a class of investor called the accredited investor or qualified investor that has realized a massive upside on investing in SpaceX. These investors are able to hold private or non-public equity. So think of them as buyers of SpaceX at fifty dollars per share or ten dollars per share. So given that SpaceX was not a public company, it was not available for direct ownership by retail or the average investor. But if you're accredited, then you could hold the stock. In the US, the rules for being accredited are very simple. You need to be rich. So there's an income threshold, and there is a wealth threshold. So this class of investor has experienced an explosive upside. They've done really well. So again, let's reflect on the average investor. The average investor is buying, let's say, at the close today. And for me, ninety percent of what I'm buying is at the close, and only ten percent is the allotment. So that price you could argue is fully valued. And again, the historical analysis of IPOs, the evidence is consistent with that, that the expected returns going forward are modest because the price is high. So the expected returns, if you're a buyer at $10, they were much higher than if you're a buyer at $170. So I think that this is really important to keep in mind. And there's a tension here, you want to diversify your portfolio, but at what price? I do think that the deeper issue is not really being talked about. And we have SpaceX, we will have anthropic, open AI. And those IPOs are going to be liquidity events where the accredited investors will reap giant rewards. And they'll be essentially selling to the average investor. The average investor buys at the high price. The average investor, because of the regulatory environment, is prevented from participating in the explosive upside. By the time that the stock comes to the IPO, by the time we get to that closing price of the first day, much of the upside has already been earned by the accredited investors. The leftovers are relegated to the retail investor. And those leftovers, the expected return is modest. To me, it's not fair. The system needs to change. And I believe it's time that we put the average investor at a priority. This should not be about the accredited investor just focus on that. Let's give some priority. Let's put the average investor for once at the beginning of the queue.