Space-related stocks witnessed a massive rally in May as excitement builds around the highly anticipated IPO of SpaceX, which could become the largest public offering ever. SpaceX said in a new filing last week that it plans a record-breaking $75 billion IPO, pricing shares at $135 and valuing the company at roughly $1.8 trillion, as quoted on Yahoo Finance (read: Space Stocks Surge as SpaceX IPO Frenzy Builds).
SpaceX May Be Huge — But IPO Day Isn't Always the Best Buy
SpaceX could become one of the most important companies of this generation. But history suggests that investors should be cautious about rushing in on IPO day, per a Yahoo Finance article.
Research from IPO expert Jay Ritter shows that among more than 9,000 IPOs between 1975 and 2021, about 60% delivered flat or negative returns three years after listing. Only 16% more than doubled in value.
Why SpaceX Is Different
Unlike a typical startup, SpaceX is coming to market after years of growth in private markets. Much of its value has already been created before public investors get access. Is it a worrying sign? Is much of the growth already priced in?
IPO Hype Often Fades
Market history shows many IPOs fall below their first-day lows within weeks. Even stocks that soar initially often give back a portion of those gains later.
Well, that doesn't mean the stock can't thrive in the public market. It simply means investors shouldn't assume the first trading day is their last chance to buy. Investors not with a strong stomach for risks should closely watch the trend. Chances to buy won’t die forever.
SpaceX Could Soon Enter Major Indexes
SpaceX is expected to debut on June 12 at a valuation of roughly $1.8 trillion.
Recent rule changes by the Nasdaq 100 and Russell 1000 could allow the company to join major indexes within days or weeks of listing, per a Yahoo Finance article.
However, the S&P Global said it was not changing the requirements for entry into its major indices. To join the S&P 500, companies must report positive earnings under generally accepted accounting principles in the most recent quarter and on a cumulative basis over the most recent four quarters.
All Are Not Equally Charmed by SpaceX
Not everyone is convinced SpaceX is worth its target valuation. Morningstar estimates the company's fair value at about $780 billion — less than half of the proposed IPO valuation, per a Yahoo Finance article.
SpaceX faces solid financial risks from heavy cash burn, a huge $4.9 billion net loss in fiscal 2025, and heavy reliance on the Starlink and capital-intensive aerospace investments, per an article published on vipwealthadvisors.
But then, SpaceX is not tied to rockets anymore; its reach has become wide-ranging — telecommunications, aerospace and artificial intelligence. And all these spheres are currently in high demand.
How to Play SpaceX: Through Diversification
The very IPO puts focus on the Renaissance IPO ETF IPO. Each quarter, the ETF is rebalanced as new IPOs are included and older members cycle out three years after their IPO. Constituents are weighted by float-adjusted market capitalization with a cap imposed on any weightings exceeding 10%.
Then comes First Trust US Equity Opportunities ETF FPX, which follows a rules-based value-weighted index measuring the average performance of U.S. IPOs during their first 1,000 trading days.
Apart from these two, iShares Russell 1000 Growth ETF IWF, and Invesco QQQ ETF QQQ are likely to hold the stock.
Pureplay space ETFs like Global X Space Tech ETF ORBX, Roundhill Space & Technology ETF MARS, Defiance Drone and Modern Warfare ETF JEDI, VistaShares Artificial Intelligence Supercycle ETF AIS and Procure Space ETF UFO are choices to play, though with a higher risk quotient as these funds do not possess sector diversification.
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Invesco QQQ (QQQ): ETF Research Reports
Renaissance IPO ETF (IPO): ETF Research Reports
iShares Russell 1000 Growth ETF (IWF): ETF Research Reports
First Trust US Equity Opportunities ETF (FPX): ETF Research Reports
Procure Space ETF (UFO): ETF Research Reports
Defiance Drone and Modern Warfare ETF (JEDI): ETF Research Reports
Global X Space Tech ETF (ORBX): ETF Research Reports
This article originally published on Zacks Investment Research (zacks.com).