IPOs have been making significant news headlines recently, with several well-known private companies announcing their plans to transition to publicly traded entities. Among these, much attention has been directed towards Elon Musk’s space exploration company, SpaceX, as it prepares for what could be a groundbreaking IPO on the Nasdaq this Friday. Additionally, artificial intelligence startups Anthropic and OpenAI are also generating a lot of excitement as they gear up for their own upcoming public offerings.
The process of an initial public offering (IPO) marks the first occasion a company offers its shares to the general public on a stock exchange, a move commonly referred to as “going public.” By selling shares, the company raises funds to support its growth. This opportunity allows individual or retail investors, who are not professional traders, to purchase shares and become part-owners of the business, potentially experiencing financial gains or losses based on the company’s performance.
The current buzz surrounding these IPOs is largely due to their unprecedented scale. SpaceX has set its share price at $135 US, potentially valuing the company at a staggering $1.8 trillion US, making it one of the largest IPOs in history. Similarly, Anthropic and OpenAI are eyeing valuations nearing $1 trillion US each, offering exposure to cutting-edge technologies like rockets, satellites, and artificial intelligence. The immense interest in these IPOs is being fueled by investors who believe in the transformative potential of these technologies on the global economy.
However, amid the excitement, some analysts have expressed concerns. Research firm Morningstar has suggested that SpaceX may be “significantly overvalued,” estimating its value at $63 US per share, well below the IPO’s offering price. SpaceX itself has acknowledged its history of net losses and the uncertainty of achieving profitability in the future.
According to Stephen Foerster, a finance professor at the Ivey Business School, Elon Musk’s control over more than 80% of SpaceX’s voting power means he will have full authority over the company’s operations and strategy. This unique setup raises questions about traditional governance safeguards, with investors essentially placing their trust in Musk’s leadership.
When a company goes public, the primary beneficiaries are the founders, with Musk expected to see a substantial increase in the value of his shares, potentially propelling him to trillionaire status. Venture capitalists, private equity firms, early investors, employees with shares, and investment banks involved in the IPO also stand to gain financially from the public offering.
Individual investors typically face challenges accessing IPO shares at the initial price, but recent trends, like SpaceX allocating a significant portion of shares to retail investors, are changing this landscape. Online brokerages, such as Wealthsimple, are facilitating Canadian clients’ requests for SpaceX IPO shares, although there’s no guarantee of allocation. Post-IPO, shares become available for trading on exchanges, allowing investors to participate.
The risks for investors in IPOs include initial volatility in trading, potential price fluctuations driven by demand, restrictions on selling for early investors and institutional shareholders, and the time required for stock stability. Foerster emphasizes the triple risk factors associated with investing in SpaceX: as a new IPO, with unproven technology, and a history of unprofitable operations, highlighting the speculative nature of such investments.
Reflecting on past major IPOs, the success stories of companies like Tesla contrast with cautionary tales such as Groupon, underscoring the unpredictable nature of IPO performance and the associated investment risks.