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SpaceX’s bankers are preparing for one of Wall Street’s biggest tests: listing a $1.78tn company at a fixed price as tech stocks are hit with waves of volatility.
Elon Musk’s lossmaking rockets-to-AI group is expected to make its market debut on Friday following what is set to be the biggest IPO on record, offering shares at $135 each, a set price that several people involved in the deal said left underwriters with less flexibility than is typical in a conventional listing.
Investors, bankers and people close to the offering say orders exceed available shares by at least three times. But oversubscription in no way guarantees the stock will surge once it begins trading.
A more difficult task will be ensuring steady trading at a time when investors are reassessing lofty tech valuations and the US-Iran ceasefire is coming under increasing strain.
In a typical IPO, underwriters use feedback collected during a roadshow to adjust a company’s valuation and final offer price before trading begins. SpaceX has inverted that process.
The company plans to raise up to $86bn by selling less than 5 per cent of its equity, an unusually small “free float” despite the huge dollar value that gives bankers greater control over how the shares price.
“Elon just came in and said what the price was . . . there was no price discovery,” said an executive at a large US hedge fund.
This week may prove a particularly difficult time to launch an IPO for a company seeking a valuation of more than 90 times its revenue last year.
Shares in many of the richly valued tech groups that dominate the US stock market have fallen sharply on fears of higher interest rates and rising uncertainty over when AI investments will begin generating returns.
The IPO market typically slams shut when the Vix index, a gauge of expected volatility in US equities, rises above 25. On Tuesday, the Vix — sometimes referred to as Wall Street’s “fear gauge” — climbed as high as 23.34, its highest level since early April.
“The primary source of investor hesitation continues to be [SpaceX’s] valuation” and “how much future success” is already reflected in the $1.78tn target, said the head of trading at a small New York broker.
In a sell-off, the deal’s stabilisation agent Morgan Stanley could enter the market and buy back an extra 83mn shares allocated to investors on top of the 555.6mn shares set to be sold by a collection of Wall Street banks in the IPO.
Stabilisation agents typically support offerings in one of two ways depending on the intensity of investor selling, either by defending the issue price immediately or by buying back stock towards the end of the session to ensure the deal closes at least flat on the day.
Musk and his team were testing their $135 per share target with investors long before the official roadshow began last week, according to a person familiar with the process.
“[$135 per share] is what Elon wants to sell it at and they’ve road-tested it with enough people that they think they can get it done,” the person said.
The billionaire is counting on an army of individual investors to back the deal. Often derided by professionals as “price-insensitive buyers”, retail traders are set to receive between 20 per cent and 30 per cent of the offering, an unusually high share for such a large IPO.
Passive fund managers will meanwhile be forced to channel billions of dollars towards SpaceX in the 15 days after it lists thanks to new fast-track inclusion rules implemented by some of the major index providers.
Hedge funds and long-only investors will absorb much of the supply in the IPO. Whether these investors plan to buy and hold the stock or flip it for a quick profit will determine the deal’s short-term success.
“Anything could happen, the stock might double on the day,” said one former investment banker who asked to remain anonymous. “But if something scary happens, an exchange of fire in Iran or a big tech slump, that speculative demand disappears in a flash.”
