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How SpaceX Humiliated Wall Street · Economy & Finance

0:00
Speaker 1: Yesterday morning, the largest company ever to go public started
0:04
Speaker 1: trading on NASDAQ. We'll get to that in just a moment,
0:07
Speaker 1: but first I have to tell you about something even stranger,
0:11
Speaker 1: which is that the stock market has, as of this week,
0:15
Speaker 1: stopped shrinking. For the last 20 years or so, the
0:19
Speaker 1: US stock market operated under a very simple and reliable
0:23
Speaker 1: mechanical law. There was always less stock available today than
0:27
Speaker 1: there had been yesterday. Since roughly 2003, we have been
0:32
Speaker 1: living through an era of public equity contraction, and it
0:36
Speaker 1: happened through three doors all at once. The first was
0:40
Speaker 1: an IPO drought. Companies that in the past would have
0:43
Speaker 1: gone public stayed private far longer, so fewer new shares arrived.
0:50
Speaker 1: The second was the buyback boom, listed companies flush with
0:54
Speaker 1: cash and short on ideas spent enormous sums buying back
0:58
Speaker 1: their own stock, which retires shares and shrinks the pool.
1:03
Speaker 1: And the third was private equity, which spent the era
1:06
Speaker 1: hovering up listed companies and taking them private, removing them
1:11
Speaker 1: from the market entirely. Less inflow, less existing supply, and
1:16
Speaker 1: the net result was that there was less and less
1:19
Speaker 1: stock available for investors to buy. If you were an investor,
1:24
Speaker 1: this was great news. There was a lot of money
1:27
Speaker 1: looking for a home and a shrinking number of shares
1:30
Speaker 1: to put it in. And when more money chases fewer shares,
1:34
Speaker 1: prices tend to go up. Valuations rose substantially. By the
1:39
Speaker 1: end of it, investors were paying far more for each
1:42
Speaker 1: dollar of company earnings than they had at the start. Now,
1:46
Speaker 1: in fairness, a good deal of the performance came from
1:49
Speaker 1: earnings actually growing. and some came from interest rates being
1:54
Speaker 1: on the floor for most of the era. I'm not
1:56
Speaker 1: going to pretend that the shrinking share count did all
1:59
Speaker 1: of the work, but it certainly didn't hurt, and it
2:02
Speaker 1: provided a steady tailwind behind the longest bull market in history.
2:08
Speaker 1: I personally found this arrangement very agreeable, and had hoped
2:12
Speaker 1: it would continue forever. There's a reason the buybacks were
2:16
Speaker 1: so large, and it tells you what these companies actually were.
2:20
Speaker 1: The big tech firms, whose returns explain most of the
2:23
Speaker 1: US market's outperformance over that era, were until very recently
2:28
Speaker 1: asset-light websites. They threw off enormous amounts of cash and
2:33
Speaker 1: didn't need much capital to run. So when they did
2:36
Speaker 1: go public, it often wasn't really to raise money that
2:40
Speaker 1: they needed, it was to give early VC investors and
2:44
Speaker 1: employees a way to cash out, and to create a
2:47
Speaker 1: liquid public currency that they could use to pay staff
2:51
Speaker 1: in stock. Having gone public, they generated more cash than
2:56
Speaker 1: they knew what to do with, and used a great
2:59
Speaker 1: deal of it to buy their own shares back. Meta
3:03
Speaker 1: is the clearest example. Facebook, as it used to be
3:07
Speaker 1: and truthfully still is known, raised around $ 16 billion when
3:11
Speaker 1: it went public in 2012. In the years since, it
3:15
Speaker 1: spent vastly more than that buying its own stock back.
3:19
Speaker 1: well over $ 100 billion, including around $ 45 billion in 2021 alone.
3:27
Speaker 1: Now just to be clear, I'm talking about dollars, not
3:30
Speaker 1: share count. Meta's shares outstanding have only drifted down gently
3:35
Speaker 1: because it keeps issuing new stock to pay employees, and
3:39
Speaker 1: then the buybacks roughly offset that. But in pure dollar terms,
3:43
Speaker 1: Meta has handed far more cash to its departing shareholders
3:47
Speaker 1: than it ever raised from selling shares in the first place. Incidentally,
3:53
Speaker 1: a good chunk of that 2021 buyback was done at
3:56
Speaker 1: an average price of around $ 330 a share, shortly before
4:01
Speaker 1: the stock fell to around $ 100 a share. So, they
4:04
Speaker 1: weren't just buying their stock back, they were buying it
4:07
Speaker 1: back at the top. The broader point still stands. For
4:12
Speaker 1: most of the last two decades, American companies were net
4:16
Speaker 1: buyers of their own shares. They were taking stock off
4:20
Speaker 1: the table, not putting it on. As of this week,
4:24
Speaker 1: that's all over. The stock market has stopped shrinking and
4:28
Speaker 1: started expanding, on a scale that we've never really seen before.
4:33
Speaker 1: Goldman Sachs is forecasting $ 225 billion of new IPO volume
4:39
Speaker 1: hitting the market this year. Once you include follow-on offerings
4:43
Speaker 1: and other share issuance from the existing giants, they expect
4:47
Speaker 1: that figure to reach $ 675 billion. This is a fairly
4:53
Speaker 1: considerable change in direction. The reason is, of course, artificial intelligence.
4:59
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Speaker 1: Big tech companies are no longer just websites. They have
6:35
Speaker 1: decided that winning the AI arms race requires transforming themselves
6:40
Speaker 1: into asset heavy firms, building enormous data centres, buying millions
6:45
Speaker 1: of very expensive Nvidia chips, and wiring up their own
6:49
Speaker 1: power plants to run them. Some are even talking about
6:53
Speaker 1: building this infrastructure in outer space. So the companies that
6:57
Speaker 1: spent two decades buying their own stock back, are now
7:01
Speaker 1: all at once selling new stock to the public. The
7:04
Speaker 1: stock market has been redesigned into a giant $ 675 billion
7:10
Speaker 1: pawn shop, where the most valuable technology companies on earth
7:14
Speaker 1: awkwardly pass the hat around to pay their infrastructure bills.
7:19
Speaker 1: Now remember what IPOs were originally for. A company usually
7:24
Speaker 1: goes public for two reasons, to raise capital for the
7:27
Speaker 1: business and to create a public market where the founders
7:31
Speaker 1: and early shareholders can eventually convert some of their stake
7:35
Speaker 1: into cash. It's not a free lunch though, you have
7:39
Speaker 1: to listen to your investors and you have to open
7:42
Speaker 1: the books. A private company shows its numbers to nobody,
7:46
Speaker 1: while a public company is required by law to publish
7:50
Speaker 1: audited accounts every quarter, in documents that any competitor can
7:54
Speaker 1: download for free. Academics have pointed out it's even subtler
7:59
Speaker 1: than that. A high stock price is itself a signal
8:03
Speaker 1: advertising to all of your rivals how excited investors are
8:07
Speaker 1: about your line of business. So you're tipping off the
8:10
Speaker 1: competition twice, once with the numbers and once with the valuation.
8:15
Speaker 1: The standards have slipped a lot over time. According to
8:19
Speaker 1: a 2002 paper by Ritter and Welsh, back in the
8:23
Speaker 1: 1960s and 70s, a prestigious investment bank would generally not
8:28
Speaker 1: take a firm public unless it had at least four
8:31
Speaker 1: years of positive earnings. By the 1980s, the bar had
8:35
Speaker 1: dropped to four quarters, and even then only 19% of
8:40
Speaker 1: firms had negative earnings at IPO. That crept up to
8:44
Speaker 1: 37% by the late 1990s and finally reached 79% at
8:50
Speaker 1: the peak of the dot-com bubble. When that bubble burst,
8:54
Speaker 1: the IPO market went quiet. the press began talking about unicorns,
9:00
Speaker 1: billion-dollar private companies like Google and Facebook that stayed private
9:05
Speaker 1: far longer than ever before because they could raise all
9:09
Speaker 1: of the capital they needed privately without any of the
9:12
Speaker 1: costs we just discussed. Today, a billion-dollar private company isn't
9:18
Speaker 1: worth commenting on. We are now in the era of
9:21
Speaker 1: the trillion-dollar private company And right now, they all seem
9:25
Speaker 1: to want to go public all at once. The biggest
9:28
Speaker 1: of them started trading yesterday, SpaceX. SpaceX priced its IPO
9:34
Speaker 1: on Thursday evening, selling more than 555 million shares at
9:37
Speaker 1: exactly $ 135 each, raising around $ 75 billion and possibly $ 86
9:40
Speaker 1: billion if the banks exercise their green shoe option. an
9:52
Speaker 1: over-allotment mechanism named after the Green Shoe Manufacturing Company which
9:57
Speaker 1: first used one in 1960. 1960. At $ 135 a share,
10:03
Speaker 1: the whole company is valued at $ 1. 78 trillion, which makes
10:08
Speaker 1: it by a wide margin the largest IPO in the
10:11
Speaker 1: history of finance. One additional thing stands out. Selling $ 75
10:17
Speaker 1: to $ 86 billion of stock at a $ 1. 78 trillion valuation
10:23
Speaker 1: means SpaceX sold around 4 or 5% of itself to
10:27
Speaker 1: the public. For the biggest IPO ever, that's a remarkably
10:31
Speaker 1: small slice. Companies usually offer around 20% of their stock.
10:37
Speaker 1: The company raised an enormous sum while parting with almost
10:41
Speaker 1: none of itself, which tells you most of what you
10:44
Speaker 1: need to know about who has the upper hand here,
10:48
Speaker 1: and it carries through into how the deal is structured,
10:51
Speaker 1: because as a shareholder you get remarkably little for your money.
10:55
Speaker 1: Like Zuckerberg and Google before him, Musk used a dual
11:00
Speaker 1: class share structure. His Class B shares carry 10 votes each.
11:05
Speaker 1: The Class A shares, the ones the public are buying,
11:09
Speaker 1: carry one vote, which means that Musk doesn't really have
11:13
Speaker 1: to listen to the people who just funded him. On
11:16
Speaker 1: top of that, SpaceX reincorporated from Delaware to Texas in 2024,
11:22
Speaker 1: and Texas law is considerably less shareholder friendly. It requires
11:27
Speaker 1: you to own a 3% stake worth tens of billions
11:31
Speaker 1: of dollars before you can even file a shareholder proposal,
11:35
Speaker 1: which removes that option for essentially everyone watching this video.
11:40
Speaker 1: And then there's the courthouse. SpaceX's charter pushes disputes into
11:46
Speaker 1: mandatory private arbitration, waives the right to a jury trial,
11:51
Speaker 1: and bans class actions. As the shareholder advocate Bruce Herbert
11:55
Speaker 1: put it, the structure closes the voting door, the courthouse door,
12:00
Speaker 1: and the proposal door simultaneously, which he called unprecedented. So
12:06
Speaker 1: you can give SpaceX your money, but you can't vote,
12:09
Speaker 1: you can't realistically sue, and you can't file a proposal.
12:14
Speaker 1: In exchange, you get a small, voteless, unlitigatable piece of
12:18
Speaker 1: the largest company ever to go public. Now you might
12:22
Speaker 1: think that putting together the largest financial transaction in human
12:26
Speaker 1: history would be a moment of triumph for Wall Street.
12:30
Speaker 1: Victory laps expensive dinners, reminding everyone who runs the global economy.
12:36
Speaker 1: But the SpaceX IPO has actually been an exercise in
12:40
Speaker 1: profound almost agonizing public humiliation for the world's most prestigious banks.
12:46
Speaker 1: If you think retail investors got a raw deal, you
12:50
Speaker 1: should see what happened to the bankers. Okay, they're still
12:54
Speaker 1: doing fine. It's a half a billion dollars in fees,
12:57
Speaker 1: but they're not doing as well as they'd hoped. Normally,
13:00
Speaker 1: an investment bank's main job in an IPO, and the
13:04
Speaker 1: way it justifies its enormous fee, is price discovery. It
13:08
Speaker 1: sets a reasonable price range, and then spends weeks calling
13:12
Speaker 1: institutional investors to ask how many shares they'd buy and
13:16
Speaker 1: at what price, building out an order book, managing the
13:20
Speaker 1: tension between the company which wants a high price and
13:24
Speaker 1: the investors who want a good deal. SpaceX completely inverted this.
13:29
Speaker 1: Matt Levine explained this with his Elon Markets hypothesis, where
13:34
Speaker 1: SpaceX simply announced that it was going public and that
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Speaker 1: the price was exactly $ 135 a share. No range, no negotiation,
13:43
Speaker 1: no balancing of sentiment. Elon Musk just decided that the
13:47
Speaker 1: company was worth $ 135 a share and told Wall Street
13:51
Speaker 1: to go out and sell it. It's the financial equivalent
13:54
Speaker 1: of a highly paid surgeon being asked to stand in
13:57
Speaker 1: the corner and hold a tray while the patient happily
14:00
Speaker 1: operates on himself. And because the banks were stripped of
14:04
Speaker 1: their function, they were also stripped of their fees. which
14:08
Speaker 1: truly is the worst part. Historically, the standard fee for
14:12
Speaker 1: taking a company public in the United States was 7%.
14:16
Speaker 1: On very large deals, they cut those fees quite a bit.
14:20
Speaker 1: Facebook paid 1.1% in 2012. Uber paid 1.3% in 2019.
14:22
Speaker 1: For SpaceX, the most powerful investment banks on earth fought
14:25
Speaker 1: over the deal and eventually agreed to less than 0.75%. Now,
14:37
Speaker 1: in fairness, 0.75% of $ 75 billion is still over half
14:42
Speaker 1: a billion dollars, so no one's taking up a collection
14:46
Speaker 1: for them, but on the rate the ThinkBankers measured their
14:50
Speaker 1: status by, they completely surrendered, taking on the role of
14:54
Speaker 1: heavily regulated utility providers processing paperwork on a fixed price
15:00
Speaker 1: deal at the margins of a discount supermarket. And how
15:04
Speaker 1: did the titans of Wall Street respond to being stripped
15:08
Speaker 1: of their power and paid a fraction of their usual rate? Well,
15:12
Speaker 1: with overwhelming desperate gratitude. The Economist recently wrote about this
15:17
Speaker 1: using a term popularized by Gen Z daters, the ick,
15:21
Speaker 1: which they describe as the sudden loss of romantic interest
15:25
Speaker 1: after watching someone you admire do something embarrassing. and watching
15:30
Speaker 1: American high-finance court SpaceX has been genuinely icky. Executives at
15:37
Speaker 1: Goldman Sachs and Morgan Stanley turned their pristine corporate lobbies
15:41
Speaker 1: into what can only be described as a high school
15:44
Speaker 1: science fair, erecting decorative rockets and hanging space banners over
15:49
Speaker 1: reception desks. Bank of America lit up the spire of
15:53
Speaker 1: its Manhattan headquarters in the shape of a rocket lifting off.
15:58
Speaker 1: There was also the matter of who they had to
16:00
Speaker 1: sell it to. A banker's natural habitat is in a
16:04
Speaker 1: quiet room with a sovereign wealth fund, an endowment fund,
16:08
Speaker 1: or someone who measures their positions in billions. People who
16:12
Speaker 1: speak the language and can be taken to dinner. For SpaceX,
16:17
Speaker 1: the bankers instead found themselves running what was essentially a
16:20
Speaker 1: very large raffle. A fifth of the largest IPO in
16:24
Speaker 1: history was set aside for retail investors. ordinary members of
16:29
Speaker 1: the public. And the public showed up. Retail orders came
16:33
Speaker 1: in at more than $ 100 billion, chasing roughly $ 15 billion
16:39
Speaker 1: of available stock. So, the book was oversubscribed by individual
16:43
Speaker 1: investors alone by something like 7 to 1. Somewhere in
16:48
Speaker 1: a Goldman office, a managing director who spent his career
16:52
Speaker 1: flying to Abu Dhabi To charm a man with a
16:55
Speaker 1: trillion dollars of assets under management was instead watching a
16:59
Speaker 1: tidal wave of $ 500 orders come in through an app
17:03
Speaker 1: and explaining to most of these people that there wasn't
17:07
Speaker 1: enough to go around. That's not really what they signed
17:10
Speaker 1: up for. At Morgan Stanley, Michael Grimes, the banker long
17:15
Speaker 1: viewed as Musk's closest advisor on Wall Street, The man
17:19
Speaker 1: who ran the IPOs of Facebook, Uber and Palantir and
17:23
Speaker 1: steered the $ 44bn Twitter buyout had been widely expected to
17:28
Speaker 1: lead the deal. He didn't. Goldman Sachs, having drafted the
17:32
Speaker 1: prospectus months before anyone outside Davos had even heard the
17:36
Speaker 1: IPO was coming, took the lead-left role out from under him. So,
17:42
Speaker 1: the most important relationship banker of the entire Musk era
17:46
Speaker 1: got outmaneuvered on the largest deal of his career. Now,
17:50
Speaker 1: the official explanation is that Goldman did more of the
17:54
Speaker 1: work and got there first, but I have a different theory,
17:58
Speaker 1: which I'd like to state clearly I have no evidence for.
18:02
Speaker 1: The banker's name is Michael Grimes, and Musk's former partner,
18:06
Speaker 1: the musician, is also called Grimes. And I find it
18:10
Speaker 1: more satisfying to believe that Elon Musk could not bring
18:13
Speaker 1: himself to hand the biggest IPO in history, to a
18:17
Speaker 1: man whose name reminded him every single morning of a
18:20
Speaker 1: relationship that didn't work out. This is almost certainly not
18:25
Speaker 1: what happened, but it improves the story, and that's good
18:28
Speaker 1: enough for me. Meanwhile, at Goldman, there was a widely
18:33
Speaker 1: circulated rumour that the bank won its role because the
18:36
Speaker 1: club DJ, known as DJ Desol, who also happens to
18:40
Speaker 1: moonlight as the CEO of Goldman Sachs, had personally slid
18:45
Speaker 1: into Musk's direct messages on X, which is Twitter. Solomon
18:50
Speaker 1: has since had to publicly deny this, going on the
18:53
Speaker 1: record to clarify that he did not in fact secure
18:56
Speaker 1: a role in the largest IPO in history by texting
19:00
Speaker 1: the world's richest man and receiving a rocket emoji as
19:03
Speaker 1: a reply. When the head of Goldman Sachs, and also
19:07
Speaker 1: a very important DJ, has to issue a formal denial
19:11
Speaker 1: that he got the deal by sliding into someone's DMs,
19:15
Speaker 1: you're no longer looking at the masters of the universe.
19:19
Speaker 1: According to Reuters, Musk even forced the banks on the
19:22
Speaker 1: deal to sign up for his maximum truth-seeking AI, Grok,
19:28
Speaker 1: which may partially explain why the IPO prospectus was so weird.
19:33
Speaker 1: To secure their miserable fee, the banks also had to
19:36
Speaker 1: stand behind some rather aggressive numbers. Chiefly, SpaceX's headline claim
19:42
Speaker 1: that it is going after a total addressable market of $ 28. 5 trillion.
19:46
Speaker 1: You have to imagine that a mathematics major who secured
19:52
Speaker 1: a job at an investment bank was given the task
19:55
Speaker 1: of explaining the valuation in the prospectus. Now, $ 28. 5 trillion
20:00
Speaker 1: is about a quarter of the entire world's annual economic output,
20:05
Speaker 1: which seems like a lot to spend on rockets and grass.
20:09
Speaker 1: And I imagine that this grad initially struggled with this number.
20:13
Speaker 1: And if we think through that number, which you definitely
20:16
Speaker 1: shouldn't do, it's not going to help thinking too much,
20:19
Speaker 1: there are roughly a billion people on the planet who
20:22
Speaker 1: earn more than about $ 12, 000 a year. Call that everyone
20:27
Speaker 1: with any real money to spend. Divide that $ 28. 5 trillion
20:32
Speaker 1: across those billion people and the prospectus is assuming that
20:37
Speaker 1: every financially active human on Earth will hand a rocket
20:41
Speaker 1: company around $ 28, 500 per year every year forever. It's worth
20:48
Speaker 1: noting that this is roughly three times what the planet
20:51
Speaker 1: currently spends on food. Now, of course, that's just an
20:55
Speaker 1: assumption in the prospectus. If you think that people will
20:58
Speaker 1: spend more than $ 28, 500 per year on average on rural
21:00
Speaker 1: broadband and other ancillary space AI services, then the stock
21:08
Speaker 1: price is actually cheap and you should pile in. Of
21:13
Speaker 1: that massive total addressable market, only about $ 2 trillion has
21:18
Speaker 1: anything whatsoever to do with space. This is because the
21:22
Speaker 1: market for space launch is about half the size of
21:25
Speaker 1: the market for potato chips. The other $ 26. 5 trillion, thus,
21:28
Speaker 1: is AI and Twitter. So, a rocket company has told
21:34
Speaker 1: the market its real opportunity is selling enterprise AI to
21:39
Speaker 1: the entire global middle class at roughly the price of
21:42
Speaker 1: a small car each year, which a math major on
21:46
Speaker 1: their first day in banking would have struggled with, but
21:50
Speaker 1: that math major is now a banker and had to
21:53
Speaker 1: turn off the part of his brain that does arithmetic
21:56
Speaker 1: and write the big number down, because that's what it
21:59
Speaker 1: takes to stay in the syndicate and earn the measly
22:03
Speaker 1: half a billion dollar fee. The power dynamic, one way
22:07
Speaker 1: or another, has flipped. For decades, investment banks were the
22:11
Speaker 1: gatekeepers of capital. If you wanted money, you played by
22:15
Speaker 1: the rules. Today, in the era of the trillion dollar IPOs,
22:19
Speaker 1: they are just eager, slightly desperate suitors, happy to accept
22:23
Speaker 1: any indignity as long as their logo appears somewhere on
22:27
Speaker 1: the prospectus. So what does a company do with $ 75
22:32
Speaker 1: billion in cash? You'd assume that it would comfortably fund
22:36
Speaker 1: SpaceX's operations, its Mars efforts, and its orbital AI data
22:41
Speaker 1: centers for a generation. You'd be wrong. In the new
22:45
Speaker 1: era of heavy industrial AI, $ 75 billion is basically walking
22:51
Speaker 1: around money. A research firm called Cape Fear Advisors combed
22:56
Speaker 1: through SpaceX's filings. and added up the disclosed contractual cash
23:01
Speaker 1: commitments that the company has made through 2030. They arrived
23:06
Speaker 1: at a cash gap of approximately $ 235 billion. So the
23:11
Speaker 1: largest IPO in history covers a little under one-third of
23:15
Speaker 1: what the company has already committed to spending over the
23:19
Speaker 1: next four years. And that's the conservative view. SpaceX's own
23:24
Speaker 1: lead underwriter expects it to burn through even more. When
23:29
Speaker 1: the bank trying to sell you the stock has gloomier
23:32
Speaker 1: projections than the critics, you've found yourself an interesting situation. So,
23:38
Speaker 1: where's the money going? Well, right off the bat, the
23:41
Speaker 1: first $ 20 billion isn't going to space at all. It's
23:45
Speaker 1: committed to paying off a bridge loan taken out in
23:48
Speaker 1: March to retire some high-yielding debt, some carrying rates as
23:52
Speaker 1: high as 12.5%. belonging to the Everything app, formerly known
23:57
Speaker 1: as Twitter, and Musk's AI startup, XAI, right before both
24:03
Speaker 1: were folded into the SpaceX conglomerate. So, out of $ 75
24:07
Speaker 1: billion raised to go to Mars, $ 20 billion immediately walks
24:12
Speaker 1: out the back door to refinance a social media buyout.
24:16
Speaker 1: Then there's the computing power, which is where it gets
24:20
Speaker 1: genuinely strange. SpaceX signed a contract under which the rival
24:25
Speaker 1: AI firm Anthropic will pay it $ 1. 25 billion a month
24:31
Speaker 1: through May 2029, a $ 45 billion commitment for AI compute
24:37
Speaker 1: that according to the filings doesn't yet fully exist. So Anthropic,
24:43
Speaker 1: a company itself about to go public to raise money,
24:46
Speaker 1: has agreed to pay Musk's rocket company $ 45 billion to
24:50
Speaker 1: rent data centres that don't appear to have been fully
24:54
Speaker 1: built yet. Then, just days before the IPO, SpaceX announced
24:59
Speaker 1: a second rental deal, this time a $ 30 billion contract
25:03
Speaker 1: with Google. Some of these firms are paying others, with
25:07
Speaker 1: money none of them has yet, for things that haven't
25:10
Speaker 1: been built. And my favourite footnote is something the FT
25:14
Speaker 1: calls the cursor option. SpaceX has structured an acquisition option
25:20
Speaker 1: that pushes it towards issuing more equity, and if it
25:23
Speaker 1: chooses not to go ahead, it triggers a cash termination
25:27
Speaker 1: fee of $ 10 billion. Let me repeat that, the penalty
25:32
Speaker 1: for not doing a deal is $ 10 billion in cash.
25:36
Speaker 1: This IPO is not a one-off. They're raising $ 75 billion
25:41
Speaker 1: today to set a share price, which they'll then use
25:44
Speaker 1: to issue more shares and more shares to fund a
25:47
Speaker 1: $ 235 billion gap, which may keep growing. And SpaceX is
25:53
Speaker 1: not alone. Right behind it are Anthropic and OpenAI, both
25:58
Speaker 1: of which have confidentially filed to go public. OpenAI raised
26:03
Speaker 1: a record private round of up to $ 122 billion back
26:07
Speaker 1: in March, and is now months later filing to raise
26:11
Speaker 1: still more, at a valuation it hopes will top a
26:14
Speaker 1: trillion dollars. In its filing it helpfully clarified that it
26:19
Speaker 1: hasn't actually decided to go public, and that it may
26:22
Speaker 1: be a while, and that there are things we want
26:25
Speaker 1: to do that are likely easier as a private company.
26:29
Speaker 1: A striking thing to announce in the document you file
26:33
Speaker 1: in order to become a public company. Anthropic, the company
26:37
Speaker 1: paying SpaceX that $ 45 billion, was recently valued at around
26:43
Speaker 1: $ 900 billion and filed its own paperwork days ago. So,
26:47
Speaker 1: one firm is funding the other's cash gap and both
26:50
Speaker 1: are about to ask the public to fund theirs. And
26:54
Speaker 1: it's not just the new companies. Alphabet, the parent of Google,
26:59
Speaker 1: just raised around $ 85 billion in a new equity offering,
27:04
Speaker 1: its first stock sale in over two decades. This was
27:08
Speaker 1: the largest equity offering in history, bigger than even the
27:12
Speaker 1: SpaceX IPO. Meta, you know, Facebook. which spent over $ 100bn
27:19
Speaker 1: buying its own stock back at the top of the market,
27:22
Speaker 1: has gone the other way entirely. Its capital spending is
27:26
Speaker 1: now forecast at up to $ 145bn a year. To fund that,
27:32
Speaker 1: it has already done its largest ever bond offering of
27:35
Speaker 1: around $ 30bn, struck a separate $ 27bn deal with the private
27:41
Speaker 1: credit firm Blue Owl, and is now, after watching Alphabet's
27:44
Speaker 1: record raise, reportedly considering selling tens of billions of dollars
27:49
Speaker 1: in new stock on top of all of that. Now
27:53
Speaker 1: it may not happen, nothing's decided, but the direction of
27:57
Speaker 1: travel is the thing. The poster child for buying your
28:00
Speaker 1: own shares back is now working through every method of
28:04
Speaker 1: raising money that there is, and when the report came out,
28:08
Speaker 1: the stock fell almost 7%. Investors, having spent a decade
28:13
Speaker 1: applauding the company for shrinking its share count, did not
28:17
Speaker 1: love the idea of it growing again. So, the smartest,
28:21
Speaker 1: most profitable companies on earth have all worked out the
28:25
Speaker 1: same thing all at once. That building AI infrastructure costs
28:29
Speaker 1: more than their own cash flows can supply. So they're
28:33
Speaker 1: passing the hat. Which brings us to an important question.
28:37
Speaker 1: Who exactly is putting money into the hat? and what
28:40
Speaker 1: happens when they try to take it back out? The
28:44
Speaker 1: answer increasingly is you. Normally a bank hands a hot
28:49
Speaker 1: IPO to its favourite institutional clients and tosses retail investors
28:54
Speaker 1: maybe 5-10% if they are lucky. SpaceX carved out somewhere
28:59
Speaker 1: between 20-30% specifically for retail. They took the largest IPO
29:05
Speaker 1: in history and turned a quarter of it into a
29:08
Speaker 1: mass market retail product. Now, when a company suddenly decides
29:13
Speaker 1: it's desperate to sell tens of billions of dollars of
29:15
Speaker 1: stock to the general public, it's worth consulting the academic literature.
29:21
Speaker 1: In 1986, the economist Kevin Rock, no relation of Kid
29:26
Speaker 1: Rock as far as I know, published a famous paper
29:29
Speaker 1: in the Journal of Financial Economics, Why New Issues Are Underpriced.
29:35
Speaker 1: outlining how IPOs are priced and why they pop on
29:39
Speaker 1: their first day. A 2002 paper by Argawal et al.
29:44
Speaker 1: explained the winner's curse. The authors explained how institutional investors
29:50
Speaker 1: are informed buyers and retail investors are uninformed. If an
29:55
Speaker 1: IPO is genuinely a great deal, the informed institutions buy
29:59
Speaker 1: it all and retail gets scaled back. But if it's
30:03
Speaker 1: a dud, the institutions walk, the bank is left holding
30:07
Speaker 1: the bag, and quickly pass it on to retail. So
30:10
Speaker 1: if you ask for 100 shares and actually get all 100,
30:15
Speaker 1: you shouldn't be celebrating. You should be terrified because the
30:19
Speaker 1: smart money just left the building. I should admit at
30:22
Speaker 1: this point that I've personally received the full allocation on
30:25
Speaker 1: every IPO I've ever applied for, which I've always chosen
30:29
Speaker 1: to read as a sign of my excellent judgement. With SpaceX,
30:34
Speaker 1: the retail book was massively oversubscribed, so that's not quite
30:39
Speaker 1: what happened here. But the fact that Wall Street designed
30:43
Speaker 1: a deal that needed $ 20 billion of retail money to
30:47
Speaker 1: get across the line tells you something about who they
30:50
Speaker 1: wanted in the building. and the mechanics of how they're
30:54
Speaker 1: keeping them there are a small marvel of financial engineering.
30:58
Speaker 1: Because Wall Street is perfectly happy to let retail buy
31:02
Speaker 1: the IPO, but it's suddenly very strict about letting them
31:05
Speaker 1: sell it. A retail investor's instinct with a hot tech
31:09
Speaker 1: IPO might be to flip it, buy at $ 135 on
31:13
Speaker 1: Thursday night, sell it at $ 180 on Friday morning. To
31:17
Speaker 1: prevent this, the brokers have rolled out new rules. Fidelity
31:22
Speaker 1: lowered its maximum IPO account balance from half a million
31:26
Speaker 1: dollars to just $ 2, 000 to attract small accounts into the deal.
31:32
Speaker 1: SoFi runs a 30-day anti-flipping window and will ban investors
31:38
Speaker 1: who sell their shares early. They even threaten a $ 50
31:42
Speaker 1: fee for any retail investor selling IPO shares within the
31:46
Speaker 1: first 120 days of trading. NerdWallet explained, that brokers do
31:52
Speaker 1: this because they want people to buy into IPOs because
31:55
Speaker 1: they believe in the company and want to hold the
31:58
Speaker 1: stock long term. Which is a polite way of saying
32:01
Speaker 1: that mass retail selling on day one would cause the
32:04
Speaker 1: price to fall and humiliate the underwriters. These lockups work
32:10
Speaker 1: along with the rapid index inclusion that Musk is reported
32:13
Speaker 1: to have demanded from index providers like NASDAQ. The major
32:17
Speaker 1: indices have for the most part, bent the knee to Musk. Normally,
32:22
Speaker 1: a company goes through a lengthy seasoning period before joining
32:26
Speaker 1: a major index. For SpaceX, Nasdaq created a fast entry rule,
32:32
Speaker 1: granting mega cap IPOs admission to the Nasdaq 100 just
32:36
Speaker 1: 15 trading days after listing. FTSE Russell went further, sweeping
32:42
Speaker 1: the company into the Russell 1000 in just five days.
32:46
Speaker 1: The one holdout was the S & P 500, which
32:50
Speaker 1: reaffirmed its existing rules and declined to fast track SpaceX
32:54
Speaker 1: at all. So look at the plumbing. Retail investors are
32:58
Speaker 1: heavily allocated into the largest most expensive public offering in history,
33:03
Speaker 1: their brokers threaten them with punishment if they sell early,
33:07
Speaker 1: and at almost exactly the point that they are allowed
33:09
Speaker 1: to sell, the giant passive index funds, which manage the
33:13
Speaker 1: retirement savings of millions of people, who have no idea
33:16
Speaker 1: any of this is going on, will be forced by
33:19
Speaker 1: Nasdaq's rules to buy billions of dollars of SpaceX stock,
33:23
Speaker 1: regardless of price. Wall Street has, in effect, lured the
33:28
Speaker 1: retail public into a room, locked the doors for a
33:31
Speaker 1: couple of weeks, and asked them to hold the price
33:34
Speaker 1: steady until the price-insensitive index funds are required to start buying.
33:39
Speaker 1: And it isn't just the American retail investor getting roped in.
33:43
Speaker 1: In the UK, the Financial Conduct Authority recently introduced a
33:48
Speaker 1: new public offer platform regime designed to let British retail
33:52
Speaker 1: investors buy into newly listing growth stocks without the burden
33:57
Speaker 1: of reading a traditional, heavily regulated prospectus. SpaceX is the
34:02
Speaker 1: first company to really use it, with British orders funneled
34:06
Speaker 1: through a broker called Marex Financial, and the best part
34:10
Speaker 1: of the new UK regulation that the platform operator, Marex,
34:15
Speaker 1: is expected to guarantee that the issuing company will have
34:19
Speaker 1: enough money to operate for at least six months after
34:22
Speaker 1: the offer closes. So, somewhere in London, a small brokerage
34:27
Speaker 1: firm has guaranteed its regulator that a $ 1. 78 trillion aerospace
34:33
Speaker 1: AI conglomerate run by the world's most unpredictable billionaire, relying
34:38
Speaker 1: for a slice of its revenue on A $ 45bn compute
34:43
Speaker 1: contract with another company that hasn't gone public yet for
34:47
Speaker 1: data centres that don't fully exist is good for the money,
34:51
Speaker 1: at least until Christmas. So, we have a $ 675bn tidal
34:57
Speaker 1: wave of new equity crashing into the market, a retail
35:01
Speaker 1: public locked in a room by their brokers, and a
35:04
Speaker 1: pipeline of trillion-dollar private companies all passing the hat to
35:08
Speaker 1: pay for Nvidia chips. The natural question is, will this
35:12
Speaker 1: break the stock market? Is this the top? There are
35:16
Speaker 1: people who think so. A sudden rush of IPOs is
35:20
Speaker 1: often the bell ringing at the top of a cycle.
35:23
Speaker 1: It happened in 1929, in the late 1960s, and famously
35:28
Speaker 1: in the dot-com bubble of 1999 and 2000. When company
35:32
Speaker 1: insiders all decide at once that right now is the
35:36
Speaker 1: very best moment to sell you their stock, they're usually
35:39
Speaker 1: right and you're usually wrong. But if you look at
35:44
Speaker 1: the actual plumbing, the slightly boring truth is that the
35:48
Speaker 1: market can probably absorb this just fine. Gavical recently pointed
35:53
Speaker 1: out that in the year to last September, S &
35:56
Speaker 1: P 500 companies issued about 1.7 trillion of stock, roughly
36:01
Speaker 1: $ 140 billion a month. So SpaceX's historic $ 75 billion raise
36:07
Speaker 1: amounts to a little over two weeks of normal issuance.
36:11
Speaker 1: Even adding in Anthropic, OpenAI, Alphabet and Meta, the American
36:16
Speaker 1: capital markets can digest all of this without collapsing. So
36:21
Speaker 1: the real question isn't whether the markets can absorb it,
36:24
Speaker 1: it's whether it will actually be a good investment. For that,
36:28
Speaker 1: the record tells a clear story. The size of an
36:32
Speaker 1: IPO has essentially no bearing on whether it turns out well.
36:37
Speaker 1: Until yesterday, the largest IPO ever was Saudi Aramco, which
36:41
Speaker 1: raised $ 25. 6 billion in 2019 and has been a poor
36:46
Speaker 1: performer ever since. Visa raised $ 17. 9 billion in the depths
36:52
Speaker 1: of the 2008 crisis and has since returned something in
36:56
Speaker 1: the region of 3,000%. It isn't the size of the
37:00
Speaker 1: deal that matters, it's the durability of the business and
37:03
Speaker 1: the price you pay. And right now investors are paying
37:07
Speaker 1: a remarkable price. At $ 135 a share, SpaceX is valued
37:12
Speaker 1: at more than 90 times its trailing revenues. Not its profits,
37:17
Speaker 1: its revenues. The company loses money on a massive scale.
37:22
Speaker 1: If you want a parallel for buying a genuinely revolutionary
37:26
Speaker 1: technology company at a high valuation, you can go back
37:30
Speaker 1: to Cisco in 2000. the ultimate picks and shovels company
37:35
Speaker 1: of the early internet. Cisco built the routers and switches
37:39
Speaker 1: that made the web work. It was a phenomenal business.
37:43
Speaker 1: In March 2000, it briefly overtook Microsoft as the most
37:48
Speaker 1: valuable company in the world. But the valuation had detached
37:52
Speaker 1: from reality, and when the bubble burst and the stock collapsed,
37:56
Speaker 1: Cisco did survive. It kept growing its earnings, stayed dominant
38:01
Speaker 1: and profitable. But it still took until December 2025, more
38:06
Speaker 1: than 25 years, for the stock to close at a
38:10
Speaker 1: new record above its 2000 peak. If you bought at
38:14
Speaker 1: the top, you waited a quarter of a century just
38:17
Speaker 1: to break even on one of the great surviving companies
38:21
Speaker 1: of the internet age. SpaceX may well colonize Mars. It
38:25
Speaker 1: may build the greatest orbital data centers the world has
38:29
Speaker 1: ever seen. But at a $ 1. 78 trillion valuation, it is
38:34
Speaker 1: priced for perfection. The prospectus shows SpaceX making twice as
38:39
Speaker 1: much from advertising as Google makes today. That, and a
38:44
Speaker 1: bunch of other things too, have to work to justify
38:47
Speaker 1: the valuation. The SpaceX IPO is the most visible symptom
38:53
Speaker 1: of a much larger shift. The 23 year era of
38:57
Speaker 1: the shrinking stock market is over. Those acid-light software businesses
39:02
Speaker 1: that threw off cash and bought back their own shares
39:05
Speaker 1: have turned into asset-heavy businesses needing power plants, laying fibre
39:10
Speaker 1: optic cable, launching massive satellites. They've become the 21st century
39:16
Speaker 1: version of the 19th century railroads. And like the railroads,
39:20
Speaker 1: they need a bottomless supply of capital to build the
39:23
Speaker 1: thing out. The stock market isn't going to break. It's
39:27
Speaker 1: just going back to its original job. It's no longer
39:31
Speaker 1: a machine that shrinks share counts to push your retirement
39:34
Speaker 1: account higher on its own. It's a pawn shop again,
39:37
Speaker 1: where the most ambitious companies on earth come to ask
39:41
Speaker 1: you for your money. When trading opened on Friday, investors
39:45
Speaker 1: stepped up to the plate. swapping their savings for a small, voteless,
39:50
Speaker 1: unlitigatable piece of a $ 28. 5 trillion dream. The stock closed
39:55
Speaker 1: the day up around 19%, which is typical performance for
40:00
Speaker 1: an IPO. I told you at the start that I'd
40:03
Speaker 1: assumed the easy years would last forever. They didn't. I'm
40:07
Speaker 1: now off to read the next two prospectuses that I
40:10
Speaker 1: probably won't get a vote on and probably won't be
40:13
Speaker 1: allowed to sue anyone about. Let's see how it goes.
40:17
Speaker 1: If you found this video interesting, you should watch my
40:20
Speaker 1: video on whether OpenAI expects a government bailout next. Don't
40:25
Speaker 1: forget to check out our sponsor Saley using the link
40:28
Speaker 1: in the description. See you in the next video. Bye.