SpaceX kicks off a wave of monster IPOs: What you need to know about companies going public
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IPOs have been in the headlines lately, as many private companies have announced that they will become publicly traded firms.
Much of the buzz is centered on Elon Musk’s rocket maker, SpaceX, which is set for what could be a record-breaking IPO when it begins trading on the Nasdaq on Friday. There’s also a lot of anticipation around artificial intelligence startups Anthropic and OpenAI — both have plans to go public in the coming months.
The hype is hard to ignore – but can these IPOs fall flat? CBC News looks at how a company goes public, who benefits and whether a buyout is a sure bet for investors.
How do IPOs work?
An IPO, or initial public offering, is the first time a company sells its shares to the public on a stock exchange. The process is also known as “going public.” Selling shares helps a company raise money to expand its business.
IPOs allow everyday people who are not professional traders to buy stocks — sometimes called individual investors or traders. Anyone who owns shares owns a piece of that business and can experience financial gains or losses depending on the company’s performance.
Why are these IPOs getting so much attention?
The magnitude of these IPOs is immeasurable. SpaceX has set its price at $135 US a share, which would value the company at $1.8 trillion US. If the initial public offering goes as expected, it will be the largest IPO ever. Anthropic and OpenAI are also looking at valuations of around $1 trillion US each.
These companies provide exposure to rockets, satellites and artificial intelligence. The high demand for these IPOs has been fueled by investors who believe that this technology can revolutionize the global economy.
Despite that enthusiasm, some analysts have raised red flags.
Research firm Morningstar rated SpaceX “overvalued” and valued SpaceX at $63 US per share, a 53 percent discount to the upcoming IPO price. In its IPO documents, SpaceX wrote that it “has a history of net losses and may not be profitable in the future.”
Stephen Foerster, a professor of finance at the Ivey Business School at Western University in London, Ont., says Musk controls more than 80 percent of the voting power at SpaceX, so he will be in full control of operations and strategy.
“It’s going to be unusual in the sense that not all of the normal management protections are being implemented. So you’re really betting on Elon Musk.”
When a company goes public, who benefits?
Founders are the winners. Musk owns about half of the shares in SpaceX – when the company goes public, those shares will be worth billions of dollars, and he could become a billionaire. Venture capitalists and private equity firms that invest in the company early can also step in. Employee shareholders are expected to collect millions. And investment banks get huge fees for planning an IPO.
How do individual investors get a piece of the IPO?
Individual investors often have a hard time accessing stocks at the IPO price – but recently, there has been a change. SpaceX allocated up to 30 percent of its IPO shares to retail investors, which is much higher than usual. And online brokerages like Wealthsimple are allowing Canadian clients to request shares in the SpaceX IPO — though that doesn’t guarantee they’ll get them.
Elon Musk’s SpaceX has revealed plans to go public in what is expected to be the largest initial public offering in Wall Street history. Like most shareholders, the world’s richest person could, with a donation, become the first billionaire.
Once the IPO has taken place, the shares will be listed on the exchange and available for trading. Individual investors can buy freely.
Even if someone does not actively invest in the IPO, they may end up owning the company’s shares in some way. Nasdaq recently relaxed its rules to allow newly listed companies to be indexed more quickly. Anyone who owns a fund that tracks the index will likely end up owning a piece of SpaceX.
What risks do investors face?
Early trading can be very volatile, with large price swings. If there’s a lot of public demand, that can drive up prices on the first day, sometimes known as an “IPO pop.”
Early investors can sell their shares sometime after the IPO, which can cause prices to drop. For some SpaceX investors, that’s after the company’s second-quarter earnings report.
Elon Musk and other key institutional investors were “locked in” for 366 days after the IPO. It can take weeks or even months for the stock to stabilize.
CBC’s Peter Armstrong breaks down what to expect from Elon Musk’s SpaceX’s initial public offering (IPO) – worth $1.77 billion – and how investors’ insatiable appetite for anything AI is currently fueling stock markets despite a struggling global economy.
Foerster says investing in SpaceX is risky on three levels: it’s an IPO, not a long-established company; largely untested technology; and so far, its business is not profitable.
“When a stock starts trading, it can go up – or it can crash. There’s no guarantee. You can lose 100 percent of your investment.”
How have other large IPOs performed?
Electric car maker Tesla completed its IPO in 2010 at a price of $17 US per share. Investors who bought shares worth $10,000 US back then would have shares worth about $2.5 million US today.
Remember Groupon? The daily deals site went public in 2011 at a price of $20 US per share, and rose 35 percent on its first day of trading. By the following year, the stock had lost more than 80 percent of its value.
