Great Company. Good Investment? |
SpaceX has transformed the launch industry, built the world’s largest satellite network, and achieved things that would have seemed impossible a decade ago.
The excitement is understandable.
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It has now completed the largest IPO ever on a U.S exchange, raising US$75 billion—more than three times the previous largest U.S. IPO, Alibaba (BABA) in 2014.
But before joining the queue to buy shares, investors should ask a simple question:
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Does a great company automatically make a great investment?
Investors love IPOs
Who wouldn’t? There’s the excitement of getting in early, the possibility of finding the next Amazon, and, of course, the fear of missing out. Looking back, some IPOs seem like obvious opportunities. Amazon is a perfect example.
Amazon IPO
I mean, who wouldn’t have wanted to get into Amazon at IPO? In hindsight, it appeared to be one of the easiest investment decisions in history. Long term it was a spectacular success.
But it didn’t start out that way.
When Amazon listed in 1997 it was an online bookstore that had been operating for only two years and was not profitable. It wasn’t the global retail and cloud-computing giant we know today. It was simply a small company with a big idea.
Half the Story
Viewed almost 30 years later, Amazon’s success seems inevitable. At the time, it was anything but. Of course, Amazon is only half the story. Looking back, the winners always seem obvious. The problem is that investors don’t have the benefit of hindsight.
Peloton IPO
Peloton looked like a winner. During the lockdowns, gyms were closed and millions of people were exercising at home. Demand for Peloton’s bikes and treadmills exploded. The stock soared, the media was enthusiastic, and the company built a passionate online community that eventually grew to around seven million members.
At the time, the story seemed irresistible. If working from home was the future, surely home fitness was too.
Looking back, the outcome seems obvious. Lockdowns ended, gyms reopened and demand slowed. But at the time, many investors believed Peloton was building the future of fitness and gyms, like office blocks, were on their way out. (Ooops just noticed the mistake in the chart – should read 2019 not 2091!)
Rivian IPO
When the electric vehicle maker listed in 2021, it seemed to have everything going for it. It was backed by Amazon and Ford, hailed as the next Tesla, and had developed one of the first all-electric pickup trucks. Investors couldn’t get enough of it.
The IPO was one of the biggest in U.S. history. Shares were priced at US$78, but closed their first day at over US$100, briefly valuing the company at almost US$100 billion – more than either Ford or General Motors.
Rivian wasn’t a fraud. It wasn’t a bad company.
It simply couldn’t live up to the extraordinary expectations that investors had built into the share price.
The Important Distinction
Sometimes investors are wrong about the company.
Sometimes they’re right about the company,
but wrong about the price they’re prepared to pay.
Perhaps that’s why IPOs are so seductive. They don’t just offer the possibility of exceptional returns – they also play on our fear of missing out (FOMO).
How does this apply to SpaceX?
The honest answer is: I don’t know. It is too early to tell.
It may become another Amazon. It may become another Rivian. Or it may become another Peloton. That’s the problem with IPOs.
Looking backwards, the winners and losers seem obvious.
Looking forwards, they never are.
Which is why the most important question isn’t whether SpaceX is a great company. It’s the one we started with:
Great company. Good investment?
History has already answered the questions posed by Amazon, Peloton and Rivian. SpaceX’s answer is still being written.
To the markets . .
Going sideways again – it hasn’t found any direction and seems to be reacting to every bit of news that hits the headlines.
SPY Charts
A disappointing week, and interesting Friday where the market just couldn’t decide which way to go resulting in a doji candlestick. It isn’t often we see such a perfect example of a long-legged doji. Technically, the explanation is that there was a battle between buyers and sellers but neither side won. Price moves substantially higher and lower during the session, but closes close to where it opened.
Apart from that, not much to see – we are still going sideways.
Longer term it has returned to the upper bound of the trading channel.
SPYG Charts
SPYG also going sideways, possible support at $114 – which may or may not hold.
Longer term, it’s right in the middle of the trading channel.
QQQ Charts
Also going sideways – possible support at $700.
Longer term it has returned to the upper bound of the trading channel. Sometimes lines on a chart can be remarkably accurate – and so can the self-delusion of the person who drew them!
VIX Chart (Volatility)
The VIX is still in low-volatility territory – what we would expect in a sideways market.
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The week ahead . . .
This week’s spotlight falls firmly on the U.S. labour market. Because markets are closed on Friday for Independence Day, the June payrolls report will be released a day early. Employment growth, unemployment and wage inflation will all be closely watched for clues about the timing of future Federal Reserve interest-rate decisions.
Investors will also continue to monitor developments in the Middle East, as any renewed pressure on oil prices could quickly influence inflation expectations.
Monday
- Pending Home Sales
- Markets continue to digest recent geopolitical developments and quarter-end portfolio positioning.
Tuesday
- JOLTS Job Openings
- Conference Board Consumer Confidence
- Manufacturing PMI
Wednesday
- ADP Employment Report
- ISM Manufacturing PMI
- Construction Spending
Thursday
- Non-Farm Payrolls (released a day early due to Friday’s holiday)
- Unemployment Rate
- Average Hourly Earnings
- Weekly Jobless Claims
- Factory Orders
Friday
- U.S. markets closed for Independence Day
The Futures
Bouncing around, as has become usual – probably in response to Middle East news. An hour ago they were much higher. Recently I’ve noticed that using the futures to predict the day’s trading session hasn’t been working particularly well!
Heather
Trade the tide not the waves
7 Responses
Been trading a variety of options strategies for years, just finished your latest book. Love the thesis, looking forward to implementing. Brian
Thank you Brian!
h
SPCX is priced at over 100 times sales. I won’t be rushing out to buy anything soon.
Hi Heather,
How’s your recovery coming along?
Hey Bob – well, would you believe I tripped over my crutches and set myself back – so another 4 weeks before I can give the crutches away, and 6 weeks until I can drive.
Going absolutely stir crazy!
Consoled myself by booking a flight to Paris for April next year – have to have somethin to look forward to!
x
h
Nooo! Oh well, Paris sounds good; the crutches will go and April will roll around before you know it (am I sounding convincing yet?). Hang in there!
thank you!