Elon Musk doesn’t think small. He is already the richest person in the world and could soon become the first trillionaire. Mr. Musk is preparing to take SpaceX, his rocket and satellite maker, public, with the company’s total valuation at least $1.25 trillion, perhaps significantly more.
The founders of two artificial intelligence companies, OpenAI and Anthropic, are also expected to launch their own colossal IPOs soon. Preliminary financial statements give each of these companies a target total valuation of $900 billion, give or take a few hundred million dollars.
These are astonishing numbers. Top executives at these companies, such as Mr. Musk, OpenAI’s Sam Altman and Anthropic’s Dario Amodei, will be able to unlock large fortunes through these public offerings, and hundreds of other employees will receive generous rewards. But for the rest of us — the vast majority of investors who will likely soon own shares in these celebrated companies through mutual funds, employer trusts and exchange-traded funds — this is a dangerous moment.
These companies could have a remarkable future. But don’t get too excited about them as investments, at least for now.
Market history contains many lessons. It shows us that given the eye-watering valuations being discussed for shares of SpaceX as well as OpenAI and Anthropic, the likelihood that these companies will make money for the common man in the next few years is extremely slim.
“They may be great as companies, but when you buy shares in them, you should pay attention to their price,” said Jay Ritter, an economist and respected IPO expert at the University of Florida. “At the potential prices reported, it would be very difficult for an investor to come out ahead in a three-year period.”
Unless you get an insider price, it’s risky to jump on the IPO bandwagon and buy individual shares of these companies. First, look at some numbers.
In the grand scheme of things
If you own a broad-based U.S. stock index fund, you’ll likely soon own shares of these companies, regardless of your personal preferences. Many of the institutions that create major stock market indices have said they will include them within days of their initial sales.
These include CRSP, FTSE Russell and MSCI. S&P Dow Jones Indices, which tracks the S&P 500 stock index, is “still seeking feedback” on a proposed shift that would give the giant’s IPOs quick access to its major indexes, the company said in a statement. I expect it to do so quickly, if only because its main competitors have said so. Nasdaq is also preparing to add the newly listed companies to the Nasdaq 100 index. ETFs based on this tech-heavy index can be used for speculative bets, unlike, for example, the Vanguard Total Stock Market Index Fund, a classic buy-and-hold fund that is part of many retirement accounts.
Despite the IPO pricing issues, I don’t see a major problem with inclusion these companies in the major buy-and-hold indices – at least not yet. That’s because initial allocations to broad index funds will be quite small.
This may seem strange given the huge market values predicted. However, what is crucial for the allocation in stock market indices is the “float” of a company – the proportion of shares that are actually on the public market. And for all three of these companies, that stake will initially be less than 10 percent of the total market value attributed to the companies, with the other shares held by the company’s founders, employees and early investors.
Nevertheless, these are remarkably large IPOs. SpaceX’s public IPO could result in the highest total value of shares sold in history. The largest was Saudi Aramco’s IPO in 2019, which ultimately raised more than $29 billion and gave the newly listed company a total market value of $1.7 trillion. According to my colleagues Rob Copeland, Lauren Hirsch and Maureen Farrell, SpaceX is expected to raise up to $75 billion in shares sold to the public, reaching a total market value of well over $1 trillion reported.
Only the shares sold to the public — say $75 billion — would be counted in stock indexes that track the entire market. That’s a lot of money for an IPO, but it’s barely noticeable relative to the U.S. stock market, which was worth $66 trillion at the end of March, according to SIFMA, the U.S. securities industry trade group.
There could be a bigger impact on the market later. After the initial “lockup period” expires – 180 days for SpaceX, according to its May 20 prospectus – many insiders would be allowed to sell shares, putting far more shares on the public market.
But the indexes and the funds based on them plan for this eventuality, Alex Poukchanski, director of index analysis at CRSP, said in an interview. The index’s subsequent adjustment would occur over a five-day period, not a single one, he said, to avoid forcing funds to buy and sell so many stocks that it could affect stock prices.
Even if you don’t like them
Such issues aside, the point of owning broad stock funds is to hold a portion of the overall stock market. “We’re not that smart as index funds,” said Rodney Comegys, chief investment officer at Vanguard Capital Management, the giant index fund provider. “We let the market determine” which stocks belong in the fund.
Perhaps one or more of these new companies will prove to be truly exceptional in the long run. Maybe no one will. With the most comprehensive index funds, you can participate regardless of the stock market performance of each company. This makes sense to me: These are already large privately held companies, and they belong in large index funds once they are part of the public markets.
But buying individual stocks – or funds that focus more on the companies – in the hope of making a big profit is another matter. The odds against you are great.
Ugly numbers
Professor Ritter has compiled an extensive public IPO database and has educated journalists like me about this complex topic for many years.
In a recent telephone conversation, he pointed out an important metric, namely the connection between a company’s share price and its annual sales: the price-to-sales ratio. When this ratio is high, a stock is highly valued – potentially irrationally, reducing the likelihood that it will generate an investment profit within three years.
He crunched the numbers for all USIPOs with sales of at least $100 million from 1980 to 2024. He then sorted them by price-to-sales ratio. He found that if that ratio exceeded 40 to one, the average return over the next three years was terrible – meaning it would take 40 years of sales to reach market value at that stock price. Specifically, the performance was 15.4 percent below the market when calculated using the insider or “offer” price and 58.5 percent compared to the closing price on the first day of trading. This closing price is what ordinary investors are likely to achieve.
At this point, we don’t know what the final price for any of the three major IPOs will be or when they will begin selling shares to the public. However, there is solid evidence for SpaceX as the prospectus was issued as a prelude to actual public sales, which are expected to begin in June.
The document showed that SpaceX had $18.7 billion in revenue last year and lost $4.9 billion. Its high valuation is based on the assumption that its sales will continue to grow quickly – and that the company will ultimately make a lot of money. Maybe it will be like that.
But depending on what its overall market value is, its initial price-to-sales ratio could be anywhere between 60 and 106. That would be well above the threshold of 40 mentioned by Mr. Ritter. The numbers are fuzzier for OpenAI and Anthropic, but both appear to be well above the 40 threshold.
I’ve been wondering about the history of other big tech companies. At my request, Professor Ritter calculated the price-to-sales ratio of the Magnificent Seven, which includes Apple, Microsoft, Amazon, Nvidia, Google, Tesla and Facebook. Years ago, when they had their IPOs, their average price-to-sales ratio was 10.7 at the offering price and 13.3 at the first day closing price. At the end of the three years, they were generally excellent investments, with an average return of 46.3 percent from the first day closing price. And of course they have all achieved excellent stock market results in the decades of their existence as listed companies.
The pricing of the new IPOs is on another planet. SpaceX, OpenAI and Anthropic could prove to be great publicly traded stocks. But it will take a long time and meteoric achievements before most people start making money from it. The IPOs may be wonderful for insiders and bankers, but they are unlikely to cause much damage to large index funds. But at this point I’m overwhelmed.