Elon Musk doesn’t think small. Already the richest person in the world, he may soon become the first trillionaire. Mr. Musk is preparing to go public with SpaceX, his rocket and satellite maker, at a total valuation for the company of at least $1.25 trillion, and perhaps substantially more.
The founders of two artificial intelligence companies, OpenAI and Anthropic, are also expected to come out shortly with colossal I.P.O.s of their own. Preliminary accounts give each of those companies a targeted total valuation of $900 billion, give or take a few hundred million dollars.
These are stupendous numbers. Top executives of these companies, like Mr. Musk, Sam Altman of OpenAI, and Dario Amodei of Anthropic, stand to unlock great fortunes through these public offerings, and hundreds of other employees will receive bountiful rewards. But for the rest of us — the vast majority of investors who are soon likely to own pieces of these ballyhooed companies through mutual funds, workplace trusts and exchange-traded funds — this is a dangerous moment.
These companies may turn out to have a remarkable future. But for now, at least, don’t get too excited about them as investments.
Market history contains many lessons. It tells us that at the jaw-dropping valuations being discussed for shares of SpaceX, as well as OpenAI and Anthropic, the probability is exceedingly small that these companies will make money for ordinary people over the next few years.
“They may be great as companies but when you buy shares in them, you should pay attention to their price,” said Jay Ritter, an economist and eminent I.P.O. expert at the University of Florida. “At the potential prices that have been reported, it would be very difficult for an investor to come out ahead in a three-year period.”
Unless you’re getting an insider price, jumping on the I.P.O. bandwagon by buying individual shares of these companies is risky. Consider a few numbers first.
In the Grand Scheme of Things
If you own a broadly based U.S. stock index fund, you are likely to own shares of these companies soon, regardless of your personal preferences. Many of the institutions that construct major stock market indexes have declared that they will include them within days of their first sales.
That includes CRSP, FTSE Russell and MSCI. S&P Dow Jones Indices, which runs the S&P 500 stock index, is still “seeking feedback” on a proposed shift that would give the giant I.P.O.s quick entry to its big indexes, the company said in a statement. I expect that it will do so expeditiously, if only because its main competitors have said they will. Nasdaq is also preparing to include the newly listed companies in the Nasdaq 100 index. E.T.F.s based on that tech-heavy index may be used for speculative bets, unlike, say, the Vanguard Total Stock Market Index Fund, a classic buy-and-hold fund that is part of many retirement accounts.
Despite the I.P.O.s’ pricing issues, I don’t see a major problem with including these companies in the major buy-and-hold indexes — at least not yet. That’s because the initial allocations in broad index funds will be quite small.
That may seem odd, given the colossal market values being forecast. But what matters for allocation in stock market indexes is chiefly a company’s “float” — the proportion of shares actually on the public market. And for all three of these companies, that proportion, at first, will be less than 10 percent of the total market value assigned to the companies, with the other shares held by the company’s founders, employees and early investors.
Even so, these are remarkably big I.P.O.s. SpaceX’s public offering could result in the largest total value of shares sold in history. The largest was Saudi Aramco’s 2019 I.P.O., which ultimately raised more than $29 billion and assigned the newly public company a total market value of $1.7 trillion. SpaceX is expected to raise as much as $75 billion in shares sold to the public, and receive a total market value well above $1 trillion, as my colleagues Rob Copeland, Lauren Hirsch and Maureen Farrell reported.
Only the shares sold to the public — say, $75 billion — would be counted in stock indexes tracking the entire market. That’s a ton of money for an I.P.O. but barely noticeable as a fraction of the U.S. stock market, which had a total value of $66 trillion at the end of March, according to SIFMA, the U.S. securities industry trade group.
There might be a greater market impact later on. Upon expiration of its initial “lockup period” — 180 days for SpaceX, according to its May 20 prospectus — many insiders would be permitted to sell shares, putting far more stock on the public market.
But the indexes, and the funds based on them, are planning for this eventuality, Alex Poukchanski, director of index analytics at CRSP, said in an interview. Tweaking of the index down the road would occur over five days, not one, he said, to avoid forcing funds to buy and sell so much stock that it might affect share prices.
Even if You Don’t Like Them
Such issues aside, the point of owning broad stock funds is to hold a piece of the entire stock market. “We’re not that smart as an index fund,” said Rodney Comegys, chief investment officer at Vanguard Capital Management, the giant index fund provider. “We’re going to let the market determine” what stocks belong in the fund.
Perhaps one or more of these new companies will turn out to be truly extraordinary over the long term. Perhaps none will. With the broadest of index funds, you will participate in each company’s stock market journey, regardless. That makes sense to me: These are already big companies in their privately held status, and they belong in large index funds once they are part of public markets.
But buying individual shares — or funds that are more concentrated on the companies — in the hope of making a big profit is another matter. The odds against you are steep.
Ugly Numbers
Professor Ritter has compiled an extensive I.P.O. public database, and has educated journalists like me about this intricate subject over many years.
In a recent phone conversation, he pointed out an important metric, the relationship between a company’s share price and its annual sales: its price-to-sales ratio. When that ratio is high, a stock is richly valued — maybe irrationally so, reducing the odds that it will turn an investment profit within three years.
He ran the numbers for all U.S. I.P.O.s with at least $100 million in sales from 1980 through 2024. Then he sorted them by price-to-sales ratio. He found that when that ratio exceeded 40 to one — meaning it would take 40 years of sales to equal the market value at that share price — the median return over the next three years was terrible. Specifically, it was minus 15.4 percent when calculated from the insider, or “offer price,” and minus 58.5 percent from the closing price on the first day of I.P.O. sales. That closing price is what ordinary investors are likely to obtain.
At this point, we don’t know what the final pricing will be for any of the three big I.P.O.s or when they will start selling shares to the public. But there are solid clues for SpaceX, because of its prospectus, issued as a prelude to actual public sales, which are presumed to begin in June.
The document showed that SpaceX had $18.7 billion in revenue last year, and it lost $4.9 billion. Its elevated valuation is based on the assumption that its sales will keep growing rapidly — and that, eventually, it will make barrels of money. Maybe it will.
But depending on how high its total market value goes, its initial price-to-sales ratio could be somewhere between 60 and 106. That would be far higher than the 40 threshold drawn by Mr. Ritter. The numbers are fuzzier for OpenAI and Anthropic, but both appear to be firmly above the 40 threshold.
I wondered about the history of other major tech companies. So at my request, Professor Ritter computed the price-to-sales ratios of the Magnificent Seven, which comprises Apple, Microsoft, Amazon, Nvidia, Google, Tesla and Facebook. Years ago, when they had their I.P.O.s., their average price-to-sales ratio was 10.7 at the offering price and 13.3 at their closing price on the first day. At the end of three years, they were generally excellent investments, averaging returns of 46.3 percent from their first-day closing price. And they have, of course, all gone on to be outstanding stock market performers in their decades of existence as public companies.
The pricing of the new I.P.O.s is on a different planet. SpaceX, OpenAI and Anthropic could turn out to be great publicly traded stocks. But it will take a long time and meteoric performances for most people to make money on them. The I.P.O.s may be wonderful for insiders and bankers, and they shouldn’t cause much harm in big index funds. But at this point, I’m underwhelmed.
