Forget about the May inflation report! The most anticipated event of the week, if not the year, is slated for Friday, June 12. This will mark the debut of Elon Musk's artificial intelligence (AI) and space economy conglomerate, SpaceX, which is raising $75 billion with its initial public offering (IPO).
The Dow Jones Industrial Average (^DJI +0.23%), S&P 500 (^GSPC +0.63%), Nasdaq Composite (^IXIC +1.09%), and Nasdaq-100 have been abuzz ahead of this historic event. Aside from raising the bar for the largest-ever cash raise, we've witnessed a flurry of rule changes by brokerages and the committees that oversee index inclusion ahead of SpaceX's public debut.
But changes aren't always made for the betterment of retail investors. A series of structural shifts on Wall Street, coupled with a SpaceX prospectus that managed to disappoint already low expectations, is poised to leave retail investors holding the bag.
The SpaceX IPO is a transfer of wealth from retail investors to company insiders
One of the ways Wall Street has failed retail investors ahead of the SpaceX IPO is by altering the inclusion criteria for several major indexes.
In an apparent effort to court SpaceX to list its shares on the Nasdaq (NDAQ 0.64%) exchange, the Nasdaq-100 changed its methodology to allow megacap IPOs "Fast Entry" into the index. These changes, which became effective on May 1, shorten the timeline for entry into the Nasdaq-100 for non-financial companies that would rank among the 40 largest in the index. Instead of the typical three-month wait to enter the Nasdaq-100, SpaceX can gain inclusion after just 15 trading days.
Additionally, the Nasdaq-100 adjusted the inclusion rules for newly public companies with low floats.
But the Nasdaq-100 isn't alone. The U.S. Russell Equity Index Series shortened SpaceX's inclusion timeline to just five trading sessions post-IPO. Five!
S&P Dow Jones Indices, a division of S&P Global, had been considering changes to allow SpaceX fast entry into the benchmark S&P 500, but ultimately decided against amending its inclusion rules.
We've also witnessed select brokers throwing age-old minimum account requirements out the window to drum up interest in the SpaceX IPO. Fidelity slashed its minimum account requirement for retail investors to participate in the upcoming IPO from $500,000 to just $2,000.
The changes implemented by Nasdaq and Russell will require index funds that track the performance of these indexes to purchase a sizable amount of SpaceX stock after its debut. This represents tens of billions of dollars in forced purchasing activity that can gobble up most of SpaceX's initial float (i.e., tradable shares).
Although this forced buying could lift SpaceX shares in the days and weeks following its June 12 IPO, SpaceX's staggered lockup period will leave retail investors holding the bag.
With fast entry effectively forcing index funds, mutual funds, and 401(k)s to buy up a significant portion of SpaceX's float, insiders are likely to be more than eager to sell their shares to retail investors. Instead of the typical 180-day lockup period for a newly public company -- the lockup period is the time when insiders can't sell their shares -- SpaceX is allowing some of its insiders (not including Elon Musk) to sell shares as early as two days after their first quarterly report (likely in August).
Regardless of whether insiders are selling to passive funds or individual investors, retail investors are their exit liquidity.
The SpaceX prospectus was far worse than imagined
In addition to Wall Street doing retail investors no favors ahead of the SpaceX IPO, the company's prospectus was far worse than imagined.
To state the obvious, SpaceX is a highly capital-intensive, money-losing business. While AI and the space economy are both long-term, trillion-dollar addressable opportunities, SpaceX doesn't appear to be particularly close to recurring profitability. That's a problem for an unproven company aiming for a $1.8 trillion valuation.
The SpaceX prospectus also unveiled unimpressive growth at AI start-up xAI -- the brainchild behind large language model (LLM) Grok. Despite the company's registration statement assigning an otherworldly total addressable market of around $26.5 trillion to its AI operations, xAI's sales grew by just 12.5% in the first quarter to $818 million. While this disappointing sales growth occurred before the announcement of a compute partnership with Anthropic, the prospectus shows that xAI has been absolutely left in the dust by LLM titans Anthropic and OpenAI.
Furthermore, SpaceX brought in just $18.67 billion in sales last year. With an IPO valuation of $1.8 trillion, its shares will be trading at a price-to-sales (P/S) ratio of 96!
To put this figure into context, no company at the forefront of a game-changing technology for more than 30 years has been able to maintain a P/S ratio above 30 for an extended period. SpaceX will debut at more than three times the level that history indicates is unsustainable.
Megacap IPOs since the late 1990s haven't exactly performed well after the debuts, either. Some of the largest and most anticipated IPOs tumbled by double digits six months after going public.
So, not only do we have a dynamic whereby rule changes are facilitating a wealth transfer from retail investors to SpaceX insiders, but all historical markers suggest SpaceX stock is going to stumble out of the starting gate. All signs point to retail investors getting the short end of the stick -- don't take Wall Street's bait.
