Investors want out of Musk’s SpaceX gamble. They may not have a choice

While some investors fear missing out on Elon Musk’s multi-trillion dollar SpaceX initial public offering, others are concerned about the potential impact on the valuation of their holdings.

Gemma Dale, director of SMSF and investor behaviour at online stock-trading platform nabtrade, said investors are wary that SpaceX’s IPO could distort the balance of their exchange-traded funds (ETFs) once it is incorporated into the funds.

The IPO “creates this issue for many clients who don’t particularly want exposure to something like SpaceX [but] who are by default, going to be acquiring it through their passive holdings,” said Dale.

The planned SpaceX IPO could raise as much as $US75 billion ($104 billion), valuing the company at up to $US1.8 trillion ($2.5 trillion), which “approaches the combined market cap of the 200 largest stocks on the ASX”, according to Morningstar.

That gives it an implied price-to-sales ratio of about 100x sales. The listing’s gargantuan size has indexes in the US mulling rule changes that would allow SpaceX to enter its indices earlier, with less of its shares traded publicly, than IPOs in the past.

Nasdaq, the exchange where SpaceX will list, has shortened the amount of time a share must trade before being included in its indexes, from three months to 15 days. The requirement that at least 10 per cent of its share trades, has also been dropped by Nasdaq, allowing SpaceX to float lesser amount.

‘We have probably heard more concern from investors who don’t want … exposure to SpaceX than those who are actually seeking it.’

Nabtrade’s Gemma Dale

S&P Global, which manages the S&P 500, is considering cutting the amount of time required to allow a stock into an eligible fund from a year to six months.

There are over 150 ETF products based on the Nasdaq Composite index and the S&P 500, including a number of popular ones in Australia. These ETFs invest in all companies on those indices by default, meaning investors cannot opt out of investing in a certain company.

Depending on the amount of SpaceX stock that floats, when it enters these indices and moves dramatically and up down, it could affect the entire index.

Dale said: “We have probably heard more concern from investors who don’t want … exposure to SpaceX than those who are actually seeking it.”

While CommBank has reportedly told customers they’ll be able to invest directly in SpaceX IPO, nabtrade customers are more divided.

Some think: “‘Even if Musk is over-promising and underdelivers, he has delivered some extraordinary things and I would like to be part of that’,” said Dale. “There’s another cohort who go, ‘this is completely outside my risk profile’.”

SpaceX has reshaped the economics of orbital launch through the reusable Falcon 9 rocket. But10 years ago, Musk predicted the first human colony could be on Mars – by 2024.

Musk’s prospectus calls for new industries to be built on the Moon, Mars, “and beyond”. The estimated total addressable market is $US28.5 trillion, “the largest in human history”, comprised of space launch, connectivity, Starlink, and AI infrastructure.

The relationship between Musk’s hype and Musk’s reality takes “the shape of an inverted pyramid” with the material base at the bottom (in this case, the real rocket accomplishments of SpaceX) but that it opens up into a “wider virtual realm”, according to author Ben Tarnoff, who has co-written Muskism: A Guide for the Perplexed with historian Quinn Slobodian.

Using this “financial fabulism” Musk projects himself as a public figure who is “making science fiction style promises that nonetheless the global investor class finds credible enough to reward him with an increased stock valuation”.

It’s this aspect of SpaceX may well be beyond the comfort zone of ETF investors. Space-related share transactions at Nabtrade amount to less than 1 per cent of total by number and size, and less than 1 per cent of active customers with exposure.

Setting aside the potential impact of SpaceX on the S&P and Nasdaq-tracking ETFs, specialised funds can be a safer way to get exposure to space investment.

Among the more notable offerings is UFO, a passive space ETF, and actively managed funds, MARS, Roundhill Space & Technology ETF, and NASA, Tema Space Innovators ETF. Cathie Wood’s ARKX Space & Defence Innovation ETF invests in cutting-edge tech and aerospace.

Michael McCarthy chief executive of Moomoo Securities said: “Speculative investments are predicated on potential future developments – and space is the same sort of investment.”

While not discussing SpaceX, McCarthy said investing directly in space stocks is “akin to buying a gold explorer or perhaps a cryptocurrency”.

Many space business models will fail, and the companies will go broke, McCarthy said: “But if they prove a viable business model the potential upside is enormous.”

While making no recommendation, he says some popular individual stocks include Rocket lab, Firefly Aerospace, AST SpaceMobile, and Intuitive Machines.

“I would caution against going all in on these because of that potential for businesses to fail.”

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