All Things SpaceX IPO: The Real Story For Mega IPOs (EP.260)

0:29We all need to make smart decisions with our money. is anxious to get in on what they see as one of the most anticipated IPOs since Facebook. They want access to the IPO price before shares begin publicly trading. The other group is more concerned about potential market distortions. They're seeing headlines about index providers changing rules to account for SpaceX and other mega IPOs, and they worry about whether mutual funds or ETFs that they already own would be required to buy or sell or rebalance in ways that negatively impact their holdings or the broader market. Now, I realize those sound like different concerns, but I think they share the same problem.

1:08Both focus too much on the IPO day. Now, I'm going to address both groups of investors. First, the investors focused on IPO access, and then the investors worried about the fund effects of a new issue. But before I do, a quick reminder that my new book, The Perfect Portfolio, is coming out on September 22nd. There is a link at the top of this episode's page in your podcast app where you can sign up for updates every other Saturday, including some behind-the-scenes looks at the publishing process, early chapter previews, and subscriber-only webinars. You can also just go to theperfectportfoliobook.com and sign up for those things.

1:49Now, let's start with the first group of investors who want to access the IPO price. Back in episode 244, which was in February, I talked about the SpaceX IPO and how IPOs work in general. So if your main question is whether you can access the IPO price, that episode is a really good companion to this one. But here's the quick version. The IPO price and the day one market price are not the same thing. The IPO price, also called the offer price, is set before the stock begins trading publicly. The market price is the price that you will see once the stock begins trading on an exchange. So for most individual investors, that market price is the first realistic price that they can access.

2:35So this is why IPO headlines can be misleading, because when you hear that an IPO popped on day one, whatever return that they're listing is usually tied to a price most investors couldn't actually get. And when you look at the IPO research, yeah, you can see that IPOs have often rewarded investors who received shares at the offer price. But for investors buying after public trading begins, the long run record is much less exciting. There is some research that I'll link to in the show notes at thelongterminvestor.com. But basically, the research shows that IPOs from 1980 through 2024 have had negative average market-adjusted and style-adjusted three-year returns when measured from the first public closing price.

3:21So if you're an investor who's eager to buy the SpaceX IPO or any of the anticipated mega IPOs, whether that's Anthropic, OpenAI, Stripe, or Databricks, just ask yourself, are you trying to capture that one-day pop by getting allocated shares before trading? Because there's no guarantee that a one-day pop even happens, but I do think it's worth being clear on why you want to buy an IPO. Because whenever I talk to investors interested in accessing an IPO, nobody's really describing their excitement as a get-rich-quick impulse. I kind of think it really is just that. I mean, they're usually saying, no, no, the company is the future, or that it'll be a great investment for decades.

4:03And look, maybe that's going to be right in this instance, but if your investment case for SpaceX or any other mega IPO depends on getting the IPO price, to me, that sounds less like a multi-decade thesis and more like a hope for a first-day pricing advantage. Because look, if a truly great company is going to be a great investment over multiple decades, then missing the IPO price shouldn't destroy that thesis. So hopefully some of these thoughts along with episode 244 helps address the investors focused on IPO access. But now I want to tackle the second question. What happens when a company this large enters the investment market ecosystem?

4:46And I think that's where actually most of the recent SpaceX or mega IPO concerns come from. To think about this, remember, companies are staying private longer, which means that some businesses may come public at absolutely enormous valuations. And that kind of creates a challenge for index providers, because if an index fund waits too long to include a newly public company that represents a meaningful part of the public market, well, then the index becomes less representative. On the other hand, And if it moves too quickly, it may create trading and liquidity concerns. And recently, that balancing act has made some investors uncomfortable because historically, index providers have required new listings to season for several months following their entry into public markets.

5:30But several major index providers have accelerated the timelines or lowered the barrier for entry. And I will link to more resources in the show notes at thelongterminvestor.com if you want to get into the nitty gritty of which indexes did what. Look, I get it. When an index provider changes its rules ahead of a massive IPO, it certainly can feel like the rules are being rewritten around one company. And because so much money tracks indexes, those methodology changes matter. On the other hand, I would be careful not to overstate the concern because index providers have changed methodologies before.

6:06I mean, markets evolve and the indexes evolve with them. Plus, I think we have to remember that index investing is great, but it has never been perfect. Securities have always entered and exited indexes, and those changes have always created some buying and selling around the edges in a way that doesn't necessarily benefit the index fund holders. So I think really, if we're going to go down this path, I don't think the question should be whether or not an index adds SpaceX quickly. I think the more important question is how much weight SpaceX or any of these IPOs actually receives once it's added.

6:44And so to understand that, you have to understand free float, which is the portion of a company's shares that is actually available for public investors to buy and sell. Shares held by founders, employees, early investors, directors, or other insiders may not be freely tradable right away. So the total market value, that tells you what the whole company is worth, but the float adjusted market value tells you how much of the company is available to public investors. And so this is at the heart of the valuation disconnect that I think gets some people concerned. There is a really detailed paper from Morningstar that I will put in the show notes at thelongterminvestor.com on CRISP, which stands for Center for Research and Security Prices.

7:26It is a extraordinarily well-known index and index provider and data provider within the profession. It is also the underlying index for some massive funds out there. Like if you look at the Vanguard total stock market index, that's a crisp US total market index that it's tracking. And so this paper from Morningstar, I think is really informative. They make some assumptions. And to be clear, these are assumptions used to estimate potential index effects. These are not predictions. These are not hard values. But the paper's in there at the show notes. And what they use for assumptions on SpaceX is that it could have a total valuation of$1.75 trillion and an initial public offering of$75 billion.

8:11So that's actually a big IPO in terms, but$75 billion is only 4.3 % of a$1.75 trillion company. So if we were going to use those assumptions. SpaceX would initially receive a 12 basis point weight in the crisp US total market index. That is 0.12%. So put differently, for every$10 ,000 invested in a fund tracking that index, like the Vanguard total stock market index, the initial SpaceX exposure would be about $12. $12 for every$10 ,000 invested. That is not a very big weight that we're talking about here, But that is just the first day float, and that is not necessarily permanent. Because after an IPO, insiders and early investors are often restricted from selling for a period of time.

9:03This restriction is called a lockup. And when the lockup expires, more shares may become available to public investors. And when more shares become available, the company's float can rise. And when float rises, that company's index can rise with it, even if the company's total valuation does not change. Now, this Morningstar paper I mentioned, they studied IPOs from 2013 through 2025 and found that free float tends to start low and then tends to rise sharply around the 180 calendar days after the IPO, which is the common lockup expiration window. So for mega cap IPOs, the paper says that the median float historically rose from roughly 10 % to about 50 or 60 % by the end of the lockup period.

9:48So the Morningstar paper I referenced earlier, they used those estimates on SpaceX and said, well, what if it goes to a 50 % float, which is sort of in line with what you've seen historically from mega cap IPOs. And remember, I said on day one, they were estimating given a$1.75 trillion valuation, which is just an estimate, as well as the IPO value, which is just an estimate. It would say the day one index exposure on a total US market index from Chris would be 0.12%. So again, for every$10 ,000 you invested, just$12 in SpaceX. That's just at the initial inclusion. But if float were to rise to 50%, then it would go up to 1.33 % of the overall index.

10:31So that's still pretty low. And I think what's really interesting here is that so many people are focusing on the changing rules and less on the impact. And I think the impact conversation is less about IPO day itself and more about what happens as more shares become available. And just as importantly, index inclusion does not mean every fund trades the full amount at the same moment. I think it's kind of misunderstood, but index changes are often announced in advance. But fund managers can also manage their implementation to buy those securities before those announcements have even happened. And so I think in general, it's not like there won't be any trading impact, I just feel like the concern here is overblown.

11:15Could mega IPOs distort the market? I don't know. Distort is a big word. Could things change? Sure. Maybe at the margins. But the impact is simply not tied to the headline valuation. So I think that's what's really important. If you see a stock go public with a$1 trillion valuation or something bigger than that, you have to remember that it is not going to get that type of weighting in the underlying indexes. It's going to depend, first of all, on which indexes add the stock, how much weight the stock receives, how much float is available, and how fund managers implement the trade. Now, I do want to share one more market composition statistic from this Morningstar paper.

11:56So they noted that SpaceX ought to be assigned to industrials, while companies like OpenAI, Anthropix, Stripe, and Databricks ought to be assigned to technology. And if all were included at the current assumed valuations and a 50 % float, Morningstar was estimating that the new industrial's weight within the crisp U.S. total market index would rise by about 1.1 percentage points, while technology would rise by only 0.4 percentage points. So it's a change that is real, but not necessarily a dramatic one that is altering the makeup of public markets. So again, yes, I think mega IPOs could affect index funds and market composition.

12:37but the impact is likely to be staged, rules-based, and more gradual than the headlines imply. So let's close things up by returning to the two groups I mentioned at the beginning. If you are focused on getting access to the IPO price, remember that most investors do not get that price in a meaningful size, and if the long-term investment case depends on getting the IPO price, it may not be as long-term of an investment as you're making it sound. If you're in that other group who's worried about index fund distortions, remember the index inclusion does not mean full-size exposure on day one. And different indexes have different rules.

13:16In fact, S &P 500 is not going to be fast-tracking SpaceX, but S &P total market funds have changed some of the timing. So you do have to look at the different rules. I don't think that investors, though, need to be trying to avoid any mutual funds or ETFs that are diversified just because those funds may eventually own SpaceX or any one of these other mega IPOs. I've established time and again, index funds are just unbelievably great innovations for the end investor, but they are not perfect. They give you really low-cost, broad market exposure. But yes, there are opportunities for traders to take advantage of when there are changes to indexes.

13:57I get it that IPO Day will have these headlines. I think that when people are talking about whether a stock popped or flopped, that's when the investors feel urgency. But for long-term investors, I'd really encourage you to think about the bigger story that unfolds over time. So if I'm going to close with one final thought for both of the investor groups who I'm trying to speak to today, the right response is not to chase one day access or panic over headlines. It's to understand the mechanics, keep the excitement in perspective, and stick with a plan that does not depend on one IPO to succeed or fail.

14:34As always, thanks for listening. And until next time to long-term investing. Thanks for listening to the Long-Term Investor Podcast. To access free financial resources and submit questions to be answered on the show, visit thelongterminvestor.com. Peter Lazaroff is an employee of PlanCorp and BrightPlan. All opinions expressed by Peter and any podcast guests are solely their own opinions and do not reflect the opinions of PlanCorp or BrightPlan. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of PlanCorp and BrightPlan may maintain positions in the securities discussed in this podcast.