Elon Musk’s SpaceX is expected to unveil IPO (initial public offering) plans as soon as June, but excited investors might do well not to rush in.
Prof Jay Ritter, known as Mr IPO for his decades of research, notes that companies listing on extreme valuations – specifically, companies with at least $100 million in sales and a price-to-sales ratio of more than 40 – have “substantially” underperformed over the following three years.
IPO data also shows the biggest flotations have often been equally big disappointments, with the 10 largest IPOs suffering median falls of 31 per cent in their first year of trading.
Little wonder that veteran investors have long joked that IPO means It’s Probably Overpriced.
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Of course, bullish investors might point to the bundles of money you’d have made in cases such as Facebook, despite it looking expensive when it went public in 2012.
True, Facebook was valued at about $100 billion on its IPO day, compared with $1.6 trillion today, but it was not smooth sailing in the early days: the stock more than halved in the months after going public, and it took more than a year before it consistently traded above its IPO price.
SpaceX bulls see it as a great company, but a great company is not necessarily a great stock, particularly at $1.75 trillion-$2 trillion. Even the best stories can be poorly priced at the start, and over-eager SpaceX investors may discover as much.
