SpaceX IPO may burn ‘mom and pop’ investors by offering 30% of $75 bn worth of shares

While the media frenzy over Elon Musk’s SpaceX IPO sizzles, there’s a real risk that investors piling into the world’s largest IPO, especially the retail crowd, will get burned.

In a typical large IPO, the percentage of shares allocated to “mom and pop” investors is no more than 10%, ensuring that large institutional players own the vast majority of newly listed shares.

This protects small investors because a launch can fail in the first days of trading or be highly volatile in the following weeks and months. Large institutions typically have deep pockets, the capacity to withstand market fluctuations, and a very high pain threshold for losses. The same cannot be said for the average retail investor.

But there’s nothing typical about SpaceX’s IPO; not just its record-breaking $1.75 trillion valuation. Retail investors are allocated about 30% of the $75 billion in shares offered. This leaves individuals much more exposed to volatility and price weakness than usual; Both of these are quite likely.

Red Flags

It has never been easier for individuals to take part in a major IPO.

Brokerage firm Fidelity Investments recently took the unusual step of lowering the eligibility requirement to participate in an IPO from a $500,000 account balance to just $2,000. Robinhood Markets, SoFi and E*Trade customers are not required to keep a dime in their accounts, while Charles Schwab requires a minimum balance of $100,000.

Small investors may be attracted. Retail flows tracker Vanda Research notes that the usual surge in stock buying following U.S. tax returns in April has been slow, perhaps because some investors have increased liquidity ahead of SpaceX’s IPO.

The track record for big, flashy tech IPOs should definitely give these retail bettors pause.

Sam Grelck, an equity strategy analyst at Truist Advisory Services, has tracked 30 major tech-related IPOs over the past 15 years, and his findings suggest that a significant decline is likely within SpaceX’s first year of trading.

Shares of each of these 30 companies experienced significant double-digit declines in the 12 months after the first-day close. Some declines were as high as 90%, with the average being 55%. “Investors should be prepared for increased volatility and the potential for significant declines when participating in new listings,” he advises.

However, their findings show that returns tend to be positive in the first three months after the IPO, even if performance is erratic. However, returns over the six- and 12-month horizons tend to be negative.

In short, the journey always has its ups and downs.

Brave Assumptions

Will SpaceX travel be smoother? Some of the numbers underlying the IPO suggest not. Analysts at Goldman Sachs, one of the insurers, predict that the company’s total revenue could rise to $474 billion by 2030 from $18.7 billion last year, and that its AI segment’s revenue will grow 100-fold from $3.2 billion to $322 billion.

“That’s a bold assumption by almost any reasonable measure,” says Anthony Saglimbene, chief market strategist at Ameriprise.

Meanwhile, analysts at Morgan Stanley, also an insurer, reportedly predict total revenue will reach $3.4 trillion by 2040.

What’s more, employees of companies launching IPOs typically have to wait six months before selling, but SpaceX waived that requirement. Some analysts warn that employees and early investors could make money from their positions by selling shares to unsuspecting retail investors shortly after they go public.

Of course, heavy selling by company insiders can be met with a buy wall from individuals. But this may not be the case, which could mean that many individual investors will suffer large losses in the downturn if more sophisticated shareholders exit early.

At the top?

On a broader scale, many analysts warn that the frenzy surrounding SpaceX’s IPO is a clear signal that the market top is here.

Of course, not everyone agrees. Noah Weisberger, U.S. equity strategist at BCA Research, notes that only 20% of mega IPOs coincide with market peaks.

But none of the previous waves of mega-IPOs can hold a candle to what we’ll see in the coming months; Following SpaceX’s monster IPO are offerings from AI darlings OpenAI and Anthropic – both expected to achieve $1 trillion valuations.

If SpaceX is successful, retail interest in these other mega public listings will undoubtedly grow rapidly. But if it crashes and burns, individuals who poured their savings into the biggest IPO the world has ever seen will instead seek shelter.