SpaceX Stock Just Crashed — Here’s Why

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1:46Money markets matter. If money is evil, then that building is hell. The show goes on! The folks are never watching. So, so! Welcome to Prof G Markets. I'm Ed Elson. It is June 24th. Let's check in on yesterday's market vitals. The major indices declined as tech stocks dropped around the world. More on that in a moment. Meanwhile, oil continued its decline, and finally the dollar hit its highest level since November on growing expectations for rate hikes this year. Okay, what's happening? Tech stocks are selling off, and the pain is hard to ignore. So far this week, the Nasdaq 100 is down roughly 4%, meaning that the index has shed over a trillion dollars in the last two days alone.

2:37Chipmakers are among the hardest hit, with an index of semiconductor companies dropping 8 % yesterday. The route has gone global too, with Asian stocks taking a steeper dive. South Korea's Kospi is down 10 % from near record highs. But the biggest drop we've seen was SpaceX. The company issued a$25 billion bond offering to finance its AI operations. And over the past three days, the stock has fallen around 20%. So for more on this latest drawdown in the tech market, we're speaking with Gil Luria, head of technology research at DA Davidson. Gil, good to see you. A lot of pain in the tech sector, the chip stocks especially.

3:23AMD is down 5 % this week. NVIDIA is down 5.5%. TSMC and Broadcom down 8%. What is going on here? Why are investors so concerned right now? I'd characterize it as a lot of volatility. The dispersion in outcomes for next year is bigger than it's been in a while. If you think about it, if AI goes well, GDP in the U.S. may grow 5 % next year. If AI rolls over and the cycle is over, GDP may only increase by 1 % or 2 % next year. Usually, we're trying to figure out if GDP is going to go 2.8 or 3.2. Right now, the range of outcomes is really big. So anytime something happens in AI that makes people more optimistic, these semi-stocks continue to run.

4:10And anytime there's a sense in the market of maybe we're close to the top, then we get these big corrections. So most of what we're seeing right now is just tremendous volatility. What do you make of what's happened with SpaceX here? I mean, we talked about it last time. I think we talked before it went public, or at least maybe in the first few days. And it's been kind of a stunning drawdown. I'm not personally that surprised by it, because, I mean, I kind of thought this had to happen eventually. But what do you mean? You were very vocal about that. You were very vocal. And I think that was very helpful to investors going in, that you spent a few days preparing investors that there's going to be a first day pop, which happened.

4:51and then the stock may come down from there. And that's happened without all those things that we talked about last week, which is there's going to be shares unlocked and there's going to be a lot of activity around index inclusion and non-index inclusion. So another place where we're going to see even more volatility, but thankfully you did prepare at least your viewers and listeners for this outcome. On that point, we haven't seen those lockup expirations yet. I mean, this is, as you say, it seems to be just pure volatility and it seems to be triggered by this$20 billion bond offering to, I guess, finance the AI build out.

5:32I mean, if we were to sort of draw that to its logical conclusion, I assume that means something like investors are worried about the fact that they need to raise more money to spend more money on AI. Where is the return going to come from? Which goes back to AI bubble concerns. Where is the ROI on this technology? Do you think that that is sort of fueling the anxiety here? Is that what is ultimately triggering people's decision to sell? Yeah, all these things are contributors to this. I mean, they just went out and raised$85 billion in equity capital. And now they're raising another 25 of debt.

6:11Now some of it is to pay other loans. Some of it may not be. Either way, they need to invest very substantially in this AI compute. Now, to be fair to them, this is a business that's in tremendous transformation right in front of our eyes, right? From a business that had most of its revenue from Starlink and then about a quarter of the revenue from space exploration. Now, with the Anthropic, Google, and Reflection contracts, most of their revenue is coming from a neocloud business. From any data center capacity to AI labs. So their business is completely different than it was a year ago. This business, the business that is now their biggest business, this NeoCloud business is incredibly capital intensive.

6:56So they do need a tremendous amount of capital. Now, part of this is they're monetizing existing data centers, but they also want to build a lot more data centers, not to mention they want to build some of them in space. What do you make of what's happened to big tech in the sell-off as well? Because they've really been dragged into this. Alphabet had a pretty significant sell-off. That was maybe a different story because a couple of their AI researchers left the company and then went over to a competitor, which got a lot of investors concerned. But also Amazon's down 3 % this week, Meta down 2%, Microsoft down as well.

7:30What do you make of big tech valuations and what is their role in this story? So the sentiment around those companies is they're spending too much money. They're not going to get the return. We would rather invest in the companies that they're spending on, so mostly chip companies, as opposed to the companies that are spending their cash flow on those chips. And that's what the market is reacting to now. But I would say that the Google changes are actually very important. The two people that left Google for the Frontier Labs are two of the only people in the world that can understand AI right now.

8:05You can really count the people in the world that can figure out how to develop a better model is probably less than 100 people globally. And the two that left Google are probably top 10. So the fact that they said Google is so bureaucratic that Google DeepMind will not lead us to superintelligence, we should go to OpenAI and Anthropic, is actually a sign that there's maybe cracks in this notion that Google is the AI winner, which is how it got from a stock in 180 to stock over 350. So that's specific to Google. But broadly speaking, investors don't believe the returns are coming. It doesn't matter that Amazon, Microsoft, and Google are telling us, of course, the returns are coming.

8:49We've already sold this data center capacity. We know a cost. We know we have a markup. We know we have a return. investors are just not buying that right now. How do you sort of justify or explain what's going on in terms of just the delta between some of the valuations that we're seeing in AI, which are certainly overpriced? I mean, SpaceX would be sort of ground zero, the perfect example, trading at, you know, 100 times revenue, last year's revenue. But then there are also companies like Microsoft, like Meta, and their price to earnings multiples are historically quite low right now. I mean, how do we sort of make sense of this market if you have this massive difference between all of these different players in AI?

9:32The market is being inconsistent. The valuation of NVIDIA, Microsoft, Micron, and to some extent Amazon is a valuation that implies that this AI thing isn't going to work out and we're at the peak of the cycle and it's going to roll over next year. The valuation of Cerebrus and Oclo and all these optical companies implies that Intel implies that the cycle will continue through 2030. So the market is being inconsistent right now because the people that don't believe that in AI are unwilling to buy those big companies. But then the people that do believe in AI are only buying the marginal AI participants.

10:13We see that as an opportunity to buy great companies like Microsoft, like NVIDIA, like Micron at attractive valuations. Because if this isn't peak cycle, if this AI thing actually works out, those stocks will be a lot higher in a year or two. Do you have any concerns about what we're seeing in the macro environment specifically? I mean, it's kind of amazing and remarkable the fact that what's happening in Iran does ultimately affect a lot of these names. because ultimately it could mean higher interest rates if we do see rate hikes, which is probably one of the biggest anxieties for investors on Wall Street right now.

10:51And no one seems able to agree. Are you looking at interest rates? Are you concerned about interest rates, especially as it relates to those names and whether or not they are buying opportunities? Oh, absolutely. And right now, again, the market is of the mind that Iran will not be an issue going forward. Therefore, oil prices will remain low, inflation will remain low, and we will not need to increase interest rates. But that obviously, as we've noticed over the last four months, can change very quickly. And so we absolutely have to keep an eye on that because that would be the major impact at a cyclical level.

11:25And then the AI trend we're talking about is a secular trend, but overlaid on all that is a cyclical aspect of it, which is very much impacted by inflation and the need to raise interest rates possibly. Gil Luria is Head of Technology Research at DA Davidson. Gil, really appreciate your time. Thank you. Thank you.

11:48After the break, a closer look at the minimum wage. And for even more markets insights, you can subscribe to my weekly newsletter, Simply Put, at simplyput.profgmedia.com.

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14:25We all do it. You have a night for yourself, but don't like the sound of the silence. So you turn on the TV just for the ambience. It's a little trick. that helps you feel like you've got company and aren't alone. And other insurers, well, they may make you feel alone. But when you switch to GEICO, you've got claims reps available around the clock. So whenever you need, you'll have people around to help. And let's turn on the washing machine, just for good measure. Well, isn't that soothing? It feels good to have support. It feels good to GEICO.

15:02We're back with Prof G Markets. It's been 17 years since the U.S. last raised the minimum wage. But while Washington stood still, much of the country moved forward. 30 states have increased their minimum wage, while 20 still use the federal floor of$7.25. cents. Our guest today realized that a natural experiment was going on across the country, so he asked what happened to pay, employment, and local economies where wages went up. And what can those real-world experiments tell us about whether and how the federal government should raise the minimum wage today? Joining us to discuss his findings, we're speaking with Aaron Dubé, Provost Professor of Economics at the University of Massachusetts Amherst and author of The Wage standard, what's wrong in the labor market and how to fix it.

15:52Aaron, thank you so much for joining us on the show. You have been studying minimum wage policies across the country. You pointed out a simple and important point, which is that we've experimented with this at the state level. What were your findings? You know, as I like to sometimes say, the silver lining of dysfunctional policymaking is that they provide us with natural experiments. So it's not a great way to set federal minimum wage to let it not change for over 17 years. But it did mean that 30 states now have raised their minimum wage. On average today, those 30 states have something a little over$14 an hour minimum wages.

16:39In contrast, the other 20 states, the minimum wage remains$7.25. That is so low, by the way, that it's essentially like not having a minimum wage because very few people actually get paid that little. So we're basically, for the first time since the 1930s, when we first introduced the minimum wage, we have like a little less than half the country with no minimum wage versus the other half, sometimes with fairly strong minimum wage, maybe even the levels of close to UK or France. So this is a contrast. And so what I did is to look to see, this is really simple. You know, sometimes getting causal evidence of any policy or something like that, which we economists, you know, spend a lot of time trying to figure out.

17:24It's hard. It's hard work and people disagree, etc. But this is one of those cases where it's actually pretty straightforward. You just look and look at these 30 states, look at these 20 states, just plot what happens to their wages, plot what happens to their share of people who are working. And it turns out that tells us a pretty compelling story. So one of the things that we hear a lot about on why we shouldn't raise the minimum wage is that it's going to be a problem for employment, that if you if you basically force employers to pay employees more, then fewer people will be employed. what did your data find on that front?

18:03Yeah, so just as a way of thinking about this, if we have a really well-functioning market, labor market, where companies are really competing hard for workers, if suddenly the government comes in and sets ways even higher than what companies are paying, some jobs will be lost because companies are just not going to be willing to hire those individuals. At the same time, if the market is not quite working that way and the market has, here's a funny word that economists use, monopsony power, which means that employers have some degree of choice. Should I pay a higher wage and have lower quits and easier recruitment?

18:42Or should I pay a lower wage and save on labor costs, but then have higher quits and harder time recruiting? In such a market, a higher federal, a higher minimum wage could end up not killing jobs, but killing vacancies and reducing turnover. So then it becomes an empirical question. And so here's what we found. So when I look at this, 2010 to 2025, okay, a broad set of 15-year period, in the states that raise their minimum wage, if you take the most impacted sector, that's restaurants, okay, this is the low-wage sector, a sizable portion of the minimum wage workforce work at restaurants. Restaurant pay in these 30 states today is maybe about, on average, like 8 % or 9 % higher than in the other 20 states, okay, than it was, say, compared to 2013 before this gap emerged.

19:42So very clear wage growth in these 30 raised states compared to the 20 states that stayed put. What happened to jobs? We can look at restaurant jobs per capita. It is virtually the same today as it was in 2013 in these two states. So clear increase in wage, pretty much sideways change in jobs in the most highly impacted sector, restaurants. In other words, the main argument against the minimum wage, which is that it causes lower employment, we have evidence that is actually not true, at least in the states that we have looked at, which makes me wonder, is there any valid argument against raising the minimum wage?

20:33And it doesn't seem to be the case. There's a number of things to think about. So one thing I will say is that, by the way, this is the simplest comparison, but of course, we can make fancier comparisons. And other work that I have done, I've said, well, maybe there are different things going on. We can compare just neighboring counties, just one side of the border raised it, another didn't. So very similar otherwise. And I show this in the Substack post. You can compare the neighboring counties across the state line. Again, clear change in wage, absolutely no change in relative employment in the two sides.

21:05And there are other things you could do. You could look at broader set of industries of low wages, et cetera. And the story doesn't change. Now, so how do employers actually absorb this? And that actually gets to an important thing to recognize. And so I talk about this in the book called the three Ps. So first of all, there's some productivity offset. Higher wage does increase productivity in a couple different ways. And that doesn't pay for itself, but it does offset some of the cost in higher wages. Then there's some reduction in profits, but then the final piece is prices. And here it is true that a higher minimum wage does lead to somewhat higher prices for particular goods and services, particularly like a burger, may cost a bit more.

21:50If you look at the overall cost of living in an estate, it is not visibly affected by a minimum wage, but particular things may cost a bit more in order for lower wage workers to have a higher pay. So that's kind of the way we can think about how the minimum wage actually gets absorbed. You know, most people tend to sort of support having a higher minimum wage when understanding these are some of the, you know, trade-offs that we may face. What do you think is the next step here? Because it seems like we have a solid body of evidence demonstrating that all of the fears that we had, that some may have had around the minimum wage being raised, are not actually true.

22:33And now, I mean, we have clearly a cost-of-living crisis in the country, increasingly an affordability crisis. It seems like this might solve a lot of those problems. Simply raise the federal minimum wage, and therefore we would see more wage growth as demonstrated in the evidence that you've laid out, especially among the lowest earners. And perhaps it might start to solve our problems. I mean, is the next step taking this to the federal government and raising the federal minimum wage? It's certainly the case that lack of wage growth is a big part of the affordability crisis. And so finding ways of raising wages is key.

23:14And that's why I wrote the book. And one of the pillars that I argue is exactly raising the minimum wage. The other one, by the way, is full employment, which also plays a very important role in helping giving more leverage to workers. But when we think about raising the minimum wage at this point, the federal minimum wage has been stagnant, like we said, for 17 years. So it is absolutely critical that we do raise it. You know, it's actually it's something that there's a broad base of support in this country for for doing this. And the problem is really in Washington. And so, of course, we can keep raising more state minimums.

23:54That is something that, you know, I think we'll probably continue to see efforts. But at the end of the day, not all states, you can actually put this on the ballot. And sometimes there's, you know, different factors that affect what kind of what legislatures are going to do. And this is why it's really critical for the federal government to do its job and actually have a minimum wage. And the key thing will be the next time we raise the federal minimum wage, we should make sure we do not let this happen again, where we go for over a generation. And there's a really simple fix, which is you index the minimum wage, which many states increasingly do.

24:31So every year it's automatically raised. It doesn't require us to debate this ad nauseum, you know, over and over again. and just let it do its job. And so I think we have the tools. I think we have the evidence. I think it's a matter of having the political will. Arun Dubé is Provost Professor of Economics at the University of Massachusetts Amherst and author of The Wage Standard, What's Wrong in the Labor Market and How to Fix It. Professor Dubé, we really appreciate your time and I'm in full support and full agreement. So thank you. Thanks for having me. Great to be here. As we end this episode, a quick check-in on my SpaceX prediction.

25:16Two weeks ago, before SpaceX went public, I predicted that the stock would rise at least 25 % on the first day of trading. That it did. The stock hit$176 on day one, up almost 30%, and then continued to rise the following week, hitting a high of nearly$220 per share. So, check. Part two of my prediction, however, was that over the next six months, the stock would get cut in half. Why? Because I believed and still believe that the valuation makes no sense. And also, because billions of dollars worth of lockups would soon expire, thus allowing early investors to sell their shares, thus putting downward pressure on the stock.

26:01That hasn't happened yet. However, we are starting to see warning signs. The stock has already fallen as much as 30 % in just a few days. It also shed$400 billion in market cap in a single day, which was the second largest one-day wipeout in stock market history. And while it did recover some losses yesterday, it's still 22 % off of its highs. Now, keep in mind, this is all happening before any of the lockups have even expired, which means that the stock has yet to go through the real test, which is when thousands of investors will choose whether to hold the stock at an unreasonable valuation or sell it and then go buy themselves a house or a boat or perhaps even a plane.