The SpaceX IPO drama explained

0:01Emma Ferrara:NPR.

0:11Emma Ferrara:SpaceX is preparing to go public later this week. The debut will mint SpaceX as one of the largest companies in the world. It will be the biggest initial public offering or IPO ever.

0:23Carden Whitfield:This big splash in the market leads to some big questions like, will this company really extend human consciousness beyond Earth?

0:32Emma Ferrara:And more earthly questions, like is SpaceX receiving special treatment from its stock exchange? That's the question we're focusing on. This is The Indicator from Planet Money. I'm Ricky Mulvey.

0:43Carden Whitfield:And I'm Darian Woods. Today on the show, we're looking at the SpaceX IPO and a rule change that turns math upside down. One now apparently equals three. We promise you don't have to do math.

0:56Emma Ferrara:We've got all of it after the break. This message comes from Indeed. Hiring? Do it the right way with Indeed's Sponsored Jobs. Claim a$75 sponsored job credit to get matched with quality candidates at Indeed.com slash podcast. Terms and conditions apply. This message comes from Mattress Firm. Sleeping hot can ruin your night. If you wake up sweaty, Mattress Firm can help. Their sleep experts are trained to match you with the right cooling mattress, like the Tempur-Breeze, designed to deliver cooling comfort for hot sleepers. Visit Mattress Firm and get a$300 instant gift plus next-day delivery when you upgrade to a Tempur-Pedic.

1:38Emma Ferrara:They make sleep easy. Restrictions apply. Next-day delivery available on select mattresses and subject to location. See store for details. This message comes from Capella University. You know that feeling when there's a spark building inside you? That you were meant for more? That's your own drive pushing you towards what's next. Capella University gets that. With their FlexPath learning format, you can set the pace and earn your degree without putting life on pause. You've built experience and know what you're capable of. Now, this is your time to turn that momentum into more. The only real question is, what can't you do?

2:17Emma Ferrara:Learn more at capella.edu. SpaceX stock is hitting public markets, or really a sliver of the company is hitting public markets. SpaceX is offering about 4 % of its shares in its IPO.

2:31Carden Whitfield:The rest of the company is still owned beyond the reach of the public by Elon Musk, SpaceX employees, and private investors.

2:39Emma Ferrara:Alex Maturi is the former CEO of S &P Dow Jones Indices. You may own a piece of that company's hit index, the S &P 500. Alex says the reasons why a company goes public has changed. Historically, IPOs were a way of raising capital. So when a company went public, they were much, much smaller.

2:59Carden Whitfield:An IPO has always been a way to cash out earlier investors. But companies used to issue public stock to build factories and expand their businesses.

3:09Emma Ferrara:Now, companies like SpaceX can grow into trillion-dollar behemoths with private dollars. So for them coming public isn't necessarily to raise new capital. It's a way to monetize their shares, give their internal shareholders, employees and such, early investors, a way to start liquidating some of it and putting a true price on the value of their company.

3:33Carden Whitfield:SpaceX doesn't need your retirement money to build its next rocket. But this gives early investors the chance to cash out.

3:41Emma Ferrara:And the company is offering up a little bit of ownership to the public to find a price for the whole thing.

3:47Carden Whitfield:Now, the Nasdaq just changed its rules on how it adds companies to its index, the Nasdaq 100. It's mostly a collection of big tech companies that trade on the exchange. SpaceX is expected to join this club.

4:00Emma Ferrara:These rules came into being just a month before the SpaceX IPO. And it's no secret these rule changes will increase the demand for SpaceX stock.

4:09Carden Whitfield:Elon Musk is a very special person who gets special rules.

4:13Emma Ferrara:Absolutely, Darian. And other companies like OpenAI and Anthropic will likely benefit from these rule changes if they go public.

4:21Carden Whitfield:The first rule change is that the Nasdaq dramatically reduced the time it takes for a big company to enter the index of its 100 largest companies.

4:31Emma Ferrara:Previously, the Nasdaq added and deleted companies from its top 100 index once per year. If a new company wanted to join the club, it had to trade for at least a few months.

4:43Carden Whitfield:The Nasdaq threw that out. Now, a new company can join the Nasdaq 100 in as little as three weeks. No need to wait for the annual meeting.

4:52Emma Ferrara:The S &P 500 has not changed its rules on letting companies into its S &P 500 club.

4:58Carden Whitfield:Former CEO Alex Maturi says there's a reason for a waiting period. Stocks bounce up and down a lot just after they go public. and the stock is kind of like a fussy newborn. He thinks that the Nasdaq isn't giving SpaceX enough time to settle down.

5:14Emma Ferrara:If you look at most IPOs, and this one's probably no exception, you know, you get a lot of dislocations early on, right? The price runs up, it collapses. You want to get to a point where there's a little more steady state. So the first concern is that SpaceX, then other big IPOs, will be rushed into the Nasdaq 100 club before they settle down. But that's not the most important real change.

5:38Carden Whitfield:I would recognize that voice from a mile away, Campbell Harvey, the finance professor at Duke University, the economist who figured out that the treasury yield curve could help predict recessions.

5:50Emma Ferrara:And yes, we've called him a few times to talk about the yield curve. It's one of Campbell's claims to economic fame. How happy are you to get a call to discuss an economic topic other than the yield curve? I'm very happy about that. So the yield curve is only one of my research ideas. It's the most popular in the media, but amongst academics, it's number 21.

6:16Carden Whitfield:His beef is with how the Nasdaq now counts the size of the companies in its index.

6:21Emma Ferrara:The most important real change was the so-called free float. Free float just means how much of this company is available for sale to the general public.

6:32Carden Whitfield:The float for SpaceX is 4 % of the company. This means that investors can only trade 4 % of SpaceX on public markets. But the NASDAQ is saying that percentage doesn't really represent the size of the company for its index.

6:47Emma Ferrara:Instead, when SpaceX is added to the NASDAQ 100, it will weigh the company as if three times the number of shares are available for sale. So you multiply by three and you get 12%. So what this will do is increase the demand by the index investors because they need to match that 12 % rather than 4%.

7:14Carden Whitfield:So what does this mean? Think of an index fund like a mutual fund where you have lots of stocks all together. So these funds that just track the index will have to buy SpaceX stock as if the The company offered triple the number of shares than they actually did.

7:31Emma Ferrara:Is this index methodology? Is it gaslighting? Is this podcast really 30 minutes long? Can I run a three-minute mile? Do numbers mean anything? This imbalance won't last forever. Some SpaceX employees will be allowed to sell their shares over time, so more will come public.

7:47Carden Whitfield:But still, these rules can create a mechanical imbalance. Campbell estimates that half of the demand for SpaceX shares will come from those investors and funds having to pretend that 4 % is really 12%.

7:59Emma Ferrara:What will that do? That will increase the price. And by the time the retail investor gets into the market, the price will be inflated by this demand. In a public statement, the Nasdaq says the new rules are an improvement on the old system, which could have forced index funds to buy even more stock after big IPOs.

8:19Carden Whitfield:But Campbell says the whole Nasdaq index has a fundamental flaw. It should only value companies based on the value of shares available to the public, in this case, 4%.

8:30Emma Ferrara:So to summarize, the Nasdaq is quickly adding new companies to its index during a volatile time. Simultaneously, it's saying that big companies that offer a small slice of ownership to the public will be represented as if they are offering triple the number of shares. This could create a demand storm.

8:48Carden Whitfield:By the way, we did reach out to Nasdaq multiple times via email and on the phone. but they would not offer a recorded interview. We also asked them if these new rules will help or harm retail investors, and we did not get an answer.

9:02Emma Ferrara:Campbell believes this story highlights a bigger problem. See, retail investors haven't been able to participate in the growth of massive tech companies like SpaceX. The company stayed private while its value skyrocketed. The only people outside these companies who can buy shares, they're called accredited investors. That basically means you make a lot of money or you're a millionaire. So if you're rich, you get the opportunity to, number one, diversify your portfolio, which we all want to do. And number two, you're able to get in early.

9:36Carden Whitfield:So one question is, how can regular people benefit from the growth of massive private companies, especially in the age of AI? Maybe Gemini or ChatGPT can figure it out. Hey, you forgot about Grok, Elon Musk's AI. Oh, man, that'd be a good one, too. By the way, if you want to learn more about growing AI wealth and proposals to tax AI that aim to benefit regular people, check out yesterday's episode about an AI dividend. This episode was produced by Julia Ritchie with engineering by Maggie Luther. It was fact-checked by Emma Ferrara. Kagan Cannon edits the show and the indicators of production of NPR.

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