Elon Musk continues to make headlines, this time with plans to take SpaceX, his ambitious rocket and satellite company, public. The expected valuation for SpaceX could skyrocket to a staggering $1.25 trillion, paving the way for Musk to potentially become the world’s first trillionaire. Additionally, founders of notable artificial intelligence companies such as OpenAI and Anthropic are preparing for their own initial public offerings (I.P.O.s), with anticipated valuations of around $900 million each.
While these valuations are monumental and executives like Musk, Sam Altman of OpenAI, and Dario Amodei of Anthropic stand to reap substantial financial rewards from the public offerings, experts urge caution for the average investor. Historical market trends suggest that the lofty evaluations associated with these companies may not translate into profitable investments within the foreseeable future.
Jay Ritter, a respected economist and I.P.O. expert at the University of Florida, points out the fundamental aspect of pricing that investors need to consider. He emphasizes that, at the potential valuations being discussed, it is unlikely that ordinary investors will see returns within a three-year period. He warns that while these companies may be innovative and promising, the prices attached to their initial offerings could lead to unprofitable investments for individual shareholders.
Moreover, investors in broad U.S. stock index funds will likely own shares of these newly public companies without actively choosing to invest in them. Major index fund providers have indicated plans to include SpaceX, OpenAI, and Anthropic shortly after their public debuts. Important indices like CRSP, FTSE Russell, and MSCI have set their sights on incorporating these firms into their rankings. S&P Dow Jones Indices is also considering a proposal to expedite their addition to the S&P 500.
However, initial shares available to the public are projected to represent less than 10% of the total market value assigned to these companies, a factor limiting the immediate impact on the broader market. Even with enormous numbers being discussed, including SpaceX raising as much as $75 billion—making it potentially the largest I.P.O. in history—the overall effect on the U.S. stock market, valued at approximately $66 trillion, is expected to be minimal.
Concerns about share dilution and market saturation looms large. After the initial lockup period, insiders may be allowed to sell shares, increasing the volume of shares on the market, a factor that funds and index managers are preparing for.
Ritter has also analyzed the price-to-sales ratios of U.S. I.P.O.s, noting that those with high ratios—meaning their market value exceeds sales by a significant margin—often yield disappointing returns for investors over a three-year horizon. With widespread speculation about SpaceX’s potential ratio soaring between 60 and 106 at its offering, the chances of profitability for ordinary investors appear slim.
In contrast, established technology companies like Apple, Microsoft, and Amazon had much more favorable price-to-sales ratios at their I.P.O.s, resulting in significant returns down the line. Given that the valuations of the upcoming I.P.O.s are far surpassing historical norms, there remains skepticism about their financial viability and potential to generate long-term profits for new shareholders.
As the buzz around these companies grows, investors are encouraged to be cautious and remember that while they may be investing in visionary companies, the path to profitability could be longer and more complex than anticipated. The upcoming public offerings may thrill insiders and financial institutions, but the prospects for everyday investors seem murky at best.
