Analysis-Short-sellers to tread carefully as Musks SpaceX debuts
NEW YORK, – Short sellers beware: Elon Musk’s SpaceX IPO may be too hot to handle.
On the face of it, the company is a natural target for short investors, who sell borrowed shares to profit from future declines in prices.
Some analysts say doubts about the company’s targeted $1.75 trillion valuation and concerns about management make this a sensible short bet. But the market’s recent bull run, led by tech giants valued at $1 trillion or more that may include SpaceX, has been brutal for those betting against the stocks.
As a result, few people expect the shorts to come out with weapons.
“This is an extremely risky short play,” said Gabriel Shahin, CEO of Falcon Wealth Planning in Los Angeles, which allows investors to buy SpaceX shares on private markets. He said there was a lot of interest from bullish investors, including retail participants, for a safe short bet.
That doesn’t mean SpaceX doesn’t have some features that could pull shorts. The company’s valuation exceeds that of many other megacaps, and the economics around technologies like the xAI platform and orbital data centers are uncertain, Morningstar analysts said in a recent note.
Peter Hillerberg, co-founder of Ortex Technologies, which provides equity lending and short-interest analytics, said the high profile of an IPO, retail and institutional interest and differing views on valuation “are normally components that can create a wide range of opinions, and that’s often where short sellers are interested.”
He noted that it was too early to gauge actual demand.
For a long time, the Tesla bear took a wait-and-see approach. “There are large natural buyers in the indices who will add the stock immediately, especially the Nasdaq 100,” said Mark Spiegel of Stanphyl Capital Partners, who thinks SpaceX is “grotesquely overvalued.”
The IPO is expected to be the largest IPO ever at $75 billion, but its free float will be less than 5% of its outstanding shares.
Spiegel said he could consider a SpaceX with more shares available for borrowing shortly after “unlock dates,” when the cost and relative difficulty of borrowing would moderate short positions, compared to immediately after the IPO. “Very few people short an IPO right away.”
While most newly public companies impose broad restrictions on insider sales for about six months after listing, SpaceX has created exceptions for some participants and is planning a phased rollout of restricted shares.
Going short on Musk’s other company, Tesla, has often been a losing bet. Tesla short sellers have lost $27 billion on paper since June 2021, according to S3 Partners, including directional bets on Tesla shares and index hedges used to explain Tesla’s inclusion in the S&P 500. Shares are up more than 2,500% in the last 10 years.
“If you look back, the experience of all this was pretty unpleasant,” said Sam Pierson, research director at S3 Partners.
Musk himself has waged a very public fight against these short positions, including prominent investors such as Jim Chanos, David Einhorn, and “Big Short” investor Michael Burry. He mocked his critics by selling red satin shorts and even sent Einhorn a box of shorts.
In August 2018, Musk posted his infamous “funding guaranteed” tweet, announcing that he was considering buying Tesla at $420 per share, sparking a surge in Tesla’s share price and resulting in a loss of approximately $1.3 billion, according to the market, in short selling.
Musk, Chanos, Einhorn and Burry did not respond to requests for comment.
More generally, short sellers have been hit over the past decade due to the prolonged bull market, and the challenges have intensified with the meme stock craze of 2021.
The Goldman Sachs Top Shorts Index, an equal-weighted basket of the 50 top short interest names in the Russell 3000 Index, continues to gain for the fourth consecutive year, rising 29% this year.
The activist short-selling playbook took a hit recently with the conviction of prominent investor Andrew Left for fraud; This is a development that could have a chilling effect on enforcement.
Even investors who are skeptical of the market’s enthusiasm may prefer to avoid the challenges of uncovering a new issue like SpaceX.
“As a short seller, you want to show that the stock has reached an untenable level, and it’s much easier to do that with trading history,” said Giuseppe Sette, co-founder of AI analysis platform Reflexivity.
With stocks trending near highs, short sellers have plenty to choose from.
“If SpaceX has a 100% success with its IPO, is that still the best short position in a market with absolute parabolic activity overall?” Mike Treacy, head of market risk at Apex Fintech Solutions, an exchange and custody platform serving retail brokerages, said:
“I don’t think so.”
This article was generated from an automated news agency feed without modifications to the text.
