What SpaceX, OpenAI and Anthropic's IPOs mean for investors | The Economist

savers. Okay, before we get into the knock-on effects, tell me why these uh I believe the in-house term is giga IPOs are all happening now. — So, there are three reasons to sell your stock to the public, which is what happens in an IPO and in a giga IPO. Uh one is to raise capital because you need it to invest and these firms all do need a lot of capital to invest. The other two reasons are because your employees want to sell their stock and your early investors because you just think it's a great time to sell shares to the public. And these are more important reasons for SpaceX, Open Eye, and Anthropic. Um, investors are really excited about AI at the moment in a way that they have been for years, but they've been sending share prices motoring up as a result. So, I think the main reason is they just think it's a great time to sell their shares. Now, — talk me through why the concern then with uh investment pots, — a massive proportion of investments these days by big institutional investors, but also by retirement savers and big pension schemes. tracks stock market indices. So these are things like the S& P 500 index or the Dow Jones index. And one of the things we're seeing happening with these gig IPOs is

that the people who make the stock market indices are fasttracking the entries of these firms into them. Some of the index providers are including these gig IPOs in their indices uh as soon as 5 days after they first listed. So, one of the worries is that index funds that automatically track them will have to buy these shares when they're still very volatile. So, they might buy them at an improper price and that could expose their investors to loss to losses. And another worry is that um once you've exhausted these trillions of dollars of index funds buying their shares immediately, there won't be enough people to trade them afterwards. And so, a kind of natural pool of buyers will have been used up and their shares

might fall afterwards. So, is the concern the speed with which this is happening or just the absolute size of these IPOs and how much they are messing with the dynamics? — Speed is definitely a concern. Size though isn't as much of a concern as you might think. These IPOs are massive, but so is America's stock market and the IPOs are actually very small compared to the size of that. Take SpaceX. It's planning to raise about $75 billion in its IPO, a huge amount. But the total value of America's stock market is more than $70 trillion. So if these firms are included in indices only at their market weights at the start, SpaceX, for example, you'd expect it to be about 0. 1% of the S& P 500 index. So I probably

shouldn't worry too much about that. — So instead of being worried, I should instead be thinking about piling in now. Is this a good time for me to ride the

index wave? — Well, not quite. And there are two things to think about here. One is that overall IPOs tend to be a bad investment for ordinary investors. There's a lot of hype around them. They initially get sold to big institutional fund managers, then they get released to the market. That's what's going to happen with SpaceX. On June the 12th, it'll get released to the public market. There's often a pop on that first day where shares are first sold to the public at a higher price than they are bought by the fund managers, but in general, IPOs tend to underperform the rest of the market over time. Uh Jay Ritter who's an academic at the University of Florida has studied IPOs and their subsequent returns over the past few decades. He's got a massive data set that goes back to about 1975. And one thing that he's found is that overall over the three years after an IPO, uh the firm IPOing tends to underperform the broader market by about 20 percentage points. And for firms that are very expensive relative to their underlying revenues and earnings, and SpaceX is definitely one of those, the underperformance tends to be even greater. So lesson one, as an individual, it's not necessarily a good idea to buy recently IPOed stocks. Lesson two is that the bankers and companies who are selling these shares in the f in the first place want to pick the best moment for the companies to sell their shares. That's probably what they're doing now. But the best moment for the seller is not necessarily the best moment for the buyer. What that means is that the company's selling their shares now kind of think that we're approaching the top of the bull market. And now what that means for the buyer is you might be at risk of buying just before a downturn starts. That's what we've seen with previous surges and IPOs. — But given recent rallies and the extraordinary valuation of SpaceX as it is, how much upside is left for investors anyway if a bare market might be just around the corner? Well, that's the big question. And it also links into another trend that we've seen, which is firms that are very successful tend to stay private for longer and only sell their shares to the public quite late in the day after they've already achieved this astonishing valuation. If SpaceX gets what it wants, it will be valued at $1. 75 trillion by the stock market. That means that investors now buying its shares have missed out on that early kind of explosive phase of its growth. from $1. 75 trillion, how much can how much bigger can it really get from there? Like it to create trillions of dollars worth of value from there, it would need to be absolutely gargantuan. And already that $ 1. 75 trillion valuation is predicated on investors paying 90 times as much for SpaceX as the sales SpaceX makes in an individual year. Not even the profits, just the sales it makes. What it would need to do in order to justify that is grow its sales and its earnings incredibly quickly. And that in turn rests on SpaceX's trajectory many years into the future. If you think that this company actually is going to launch data centers into space, sell huge amounts of compute to Earth, maybe find a way to monetize taking people to Mars. If you basically think this company is going to take over the solar system, yeah, maybe you should pay this multiple for it and you can earn returns. I might have a bit more of a sober assessment of its prospects than that, though. — So, do you see this as a sort of fundamental shift in the way markets work in the terms of in terms of the you know, IPOs and fasttracking into indices and so on or is this just a little pocket of time while AI hype is at its absolute peak? I think it is a bit of a shift in how markets are working because for years we've seen the big tech firms operating with very little capital and throwing off large amounts of cash which they've essentially given back to investors by

buying back their shares. Now what we're seeing not just with these IPOs but with the tech giants issuing lots more bonds than they used to issuing lots more followon shares than they used to. Rather than returning cash to investors they're sucking more of it up. So that means investors in turn have less cash to plow into the stock market and push prices up. So I think we're seeing some of the capital flows that once helped boy stock markets reverse and we should be nervous that should send stock markets down. — Josh, thanks very much as ever for your time. — Thanks Jason.