Key Points
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SpaceX is seeking $75 billion in funding through its IPO, which could value it at $1.77 trillion.
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Investors should look beyond hype and examine a company’s fundamentals.
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Knowing the difference between speculation and investing can help save investors from potential losses.
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After a quiet few years, initial public offering (IPO) mania is picking up, with three of the most anticipated IPOs in years: SpaceX, Anthropic, and OpenAI. Anthropic and OpenAI’s anticipated IPOs don’t have a date yet, but SpaceX is set to go on June 12.
To say there’s a lot of noise surrounding SpaceX’s IPO (both good and bad) would be an understatement. It’ll be the largest IPO in stock market history, with SpaceX seeking $75 billion in funding that could value the company at $1.77 trillion, more than all but eight public companies (as of market close on June 5).
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Despite the historic feat, the No. 1 takeaway for investors won’t be the record-breaking amount. It’ll be the dangers of investing in a company solely based on hype and the fear of missing out (FOMO). FOMO gets the best of us, and the bigger the hype, the harder it becomes to remain objective.
Image source: Getty Images.
Always look beyond the surface
On the surface, investing in SpaceX can seem like investing in the future of space exploration and infrastructure. And while that’s not wrong, it’s important to look under the hood and beyond the hype.
Last year, SpaceX made $18.7 billion in revenue but ended the year with a net loss of $4.9 billion. Those aren’t quite eye-popping numbers for a company likely to be valued at $1.77 trillion.
That isn’t to say SpaceX isn’t a great company. It has been disruptive and masterful at selling a vision. However, the larger point is the growing disparity between valuations and fundamentals.
Three questions to ask yourself before investing in an IPO
Investing in “the next big thing” is always alluring, but it isn’t always the smartest move if it comes with a premium and little to no room for error. Before investing in a hyped IPO (whether justified or not), it’s important to ask yourself a few questions, starting with whether you’re investing or speculating.
Many people speculate on stocks and think they’re investing, but the two are different. When you speculate, you’re essentially gambling on short-term price movements. When you invest, you’re buying a piece of a business based on fundamentals. Ideally, you’re investing and not speculating.
The second question is what has to go right for a company to justify its valuation. Again, this is bigger than SpaceX, but in its case, coming in trading at nearly 94 times sales means it’ll need perfect execution for quite some time to justify its price. Which brings us to the third question: What is your time horizon?
Assuming you’re investing in an IPO company because of its vision, you should have a rough idea of how long it’ll take to accomplish that vision. Some goals can be accomplished in five years, while others could take a couple of decades. If you’re not in it for the long haul (The Motley Fool always recommends holding a stock for a minimum of five years), it’s likely best to avoid it altogether because the inevitable volatility could be hard to stomach.
Taking the time to answer these questions can possibly save you a lot of headaches and money in the future.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
