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Chapter 1: What is the significance of the SpaceX IPO?
Hey team, it's Frances. Look, today is a big day for the share market. The first of one of three big tech AI listings for this year is going live and it's SpaceX, which means Elon Musk is attached, which means, of course, there is a whole wholesome pony show circus attached as well.
It's going to be interesting and I wouldn't be surprised if you see some fluctuations whether or not you're taking part in this IPO. You will probably see some ripple effects through your KiwiSaver, through any other investments that you have. It's going to be a biggie and it's just the start. So I wrote a whole piece about it in my weekly investing newsletter, The Market Memo.
And I thought, what better time than to get that here for you as well, just in case you're not subscribed to my newsletter. When SpaceX goes live today, let's check out my interesting feelings on the matter, shall we say. I've also got another edition that's gone out on this, but let's just do one at a time.
Chapter 2: How does an IPO work and what does it mean for investors?
If you would like to subscribe to the Market Memo, super easy to do, franciscook.co.nz slash invest. But until then, here's my thoughts. The SpaceX IPO needs a bright red hype warning. Part one. Hey team, cards on the table, I've been a Musk hater since before it was cool.
I've always thought he was overhyped, said cringey things, and had a habit of making grand promises that he didn't deliver on. But I'm also a solid believer in letting people invest their money in the ways that matter for them. And if something is a possibility to help normal people get ahead, I can usually be won over.
So, with my declaration of bias aside, I've been watching the upcoming SpaceX IPO with a lot of interest. As usual with anything Musk, it's getting a lot of hype and a lot of interest.
Chapter 3: Why are retail investors getting a larger share of the SpaceX IPO?
And it's working differently from normal in a few key ways. It's not just the biggest ever IPO, although it's that too. They're targeting a valuation of $2 trillion, which is... quite a few zeros. It's also open to the little guys, you and me, in a fairly unprecedented way. So, is it a good idea for your cash? Let's run through it. First, WTF is an IPO.
We've talked before about how the share market just lets you become a business owner without actually running the business every day. Well, an IPO is the first step in that process.
Chapter 4: What are the risks associated with investing in SpaceX's IPO?
IPO stands for initial public offering. It's when the public, you and me, are given the chance to own a bit of that company for the first time. It'll be listed on the stock exchange, where those pieces of the business will be bought and sold like any other share. Companies do it to raise money, usually so that they can invest back into the business and become even bigger and more successful.
So why does SpaceX want to do it? They want to raise more than $80 billion, which could fund all sorts of things, from rockets to improving Starlink, or those Mars ambitions we're always hearing about, whatever. And an IPO does get people pretty hyped, because hey, it's the first time it's been publicly available.
You might not have been able to get in at the actual beginning of the company, but this is pretty close to it. Pros and cons to that though, because as they say when you list a house, Valuation is one thing, and finding out what people will really pay is another.
Chapter 5: How does SpaceX's IPO differ from traditional IPOs?
It's the exact same on the share market. Smart people come in, value the company, say what price they should put on the shares, and then it goes out to the market and you find out whether people will actually buy or sell at that price. You might have signed up and bought a bargain as people scrap over the shares and push the price up. Well, nice. You made a profit.
Or you might have been sucked in by hype that others weren't. You paid a lot and now others aren't as interested. The price drops. You make a loss. So you have the possibility of a fast gain or equally fast loss.
Chapter 6: What should investors consider before buying SpaceX shares?
When you look at it this way, there is actually two different prices in the mix for an IPO. Because when people sign up for a normal IPO, there's the offering price. That's the price for those who say, yep, amazing, I'm in. They sign up to the IPO before it hits the market at a set price from those valuers. They pay. And from the listing day, those shares are theirs.
and can be resold on the regular share market like any other stock. Which is why we have the offering price and then the opening price. The opening price is what everyone else will pay once the shares hit the share market for real.
They can buy and sell from other investors and we get that moment of the market deciding what those shares are truly worth based on how much people are competing for them.
Chapter 7: What are the implications of retail investor participation in the IPO market?
So who gets the offering price? It's often only available to certain investors, and it's usually the big boys. I'm talking big funds, banks, pension managers. Now for the average IPO, 90% of the shares go to those big fellas. Retail investors, that's you or me with our apps, might have 10% of those IPO shares set aside for us that we can sign up to get at the offering price.
And you might say, hey, I'd like to buy this many shares at the offering price. And then the company comes back and says, yeah, we've got too many people wanting to buy it. So we're going to give you less than that. Like it or lump it. If you want more, well, you'll have to duke it out once it hits the open share market.
And if it's a good buy, well, yeah, there might be lots of people wanting in on it. This time, though, SpaceX is doing something a little different. On the face of it, it looks like a real man-of-the-people moment. Underneath, I think it's a pretty cynical play for more money. Now to be fair, SpaceX is genuinely breaking from tradition here.
The little guys, the retail investors are getting triple the opportunity with their IPO. Instead of 10%, were apparently able to buy up to 30% of the offering. Those shares are being sold directly through places like Robinhood, Fidelity, and Charles Schwab, at the same time as the big institutional players get their shot, and for the same IPO price. My first thought? Love to see it.
My second thought? When I compare this to Musk's other company and how Tesla stock performs, it feels a little less like a generous move. Because Musk didn't get to be the world's richest man by being naive about what motivates people. So, the Tesla tussle. Tesla is widely considered overhyped and overvalued. That's not me and my bias speaking, not this time at least.
Typically, they say a good price to earnings ratio is around 20 to 25, which is where you look at how much it costs to buy a share versus how much you are likely to earn from it. Tesla? At the time of writing, their price to earnings is 390. Over the last 10 years, they've averaged 160. That is not normal. Very not normal. You're paying in way higher than what you get back.
So, yes, I'm confident in calling them overvalued, no matter how much people might be interested in the company and its future potential. What's propping up this very high share price? Retail investors. From what I can tell, it's the man, the myth, the legend that keeps them investing.
Musk has a dedicated fan base who believe in what he's selling, that he's a visionary, that sees things other people don't. I, for sure, don't see him that way, but to each their own. The institutional investors, well, they've been heading for the exits for a long time now. The big companies with their teams of analysts have been ditching Tesla in big numbers.
UBS Asset Management cut its Tesla stake by about 74%. Nomura reduced its position by more than 80%. Goldman Sachs and Morgan Stanley both cut down their investments. Retail is piling in. Institutions are walking out. So, Musk knows who his most loyal buyers are. And when he's looking to make a big bang for his buck on IPO, he wants to get the best result possible.
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