Big IPOs Have Often Lagged The Market
Wall Street is preparing for the expected blockbuster debut of Elon Musk’s SpaceX next month, but recent history offers a warning for investors eager to buy into the biggest public listings.
A Reuters analysis of the 50 IPOs with the highest valuations over the past five years found that investors would have been better off buying an S&P 500 index fund about three-quarters of the time.
Returns Trail The S&P 500
An investor who bought each of the IPOs analyzed by Reuters would be up an average of 27% through May 21.
That compares with an average gain of 53% for the S&P 500 over the same periods. The analysis assumes investors could buy at the IPO price, which is often difficult for retail buyers, or simply buy the broad-market index instead.
First-Day Buyers Often Fare Worse
The performance is even weaker for investors who buy during the intense first day of trading, when demand and excitement can push prices far above the IPO level.
Dennis Dick, a proprietary trader at Triple D Trading, said it is difficult to make money unless investors are able to get in during the early stages, before the company actually goes public.
SpaceX Could Break Records
SpaceX is expected to trade under the ticker SPCX and filed its prospectus on Wednesday. Its share sale could come as early as June 11.
The company is expected to target a valuation of 1.75 trillion dollars, which would dwarf previous Wall Street stock listings. Musk is also making some shares available to retail investors through platforms such as Robinhood and SoFi, giving smaller investors a potential route into the offering.
Valuation Is The Key Risk
The expected valuation is extraordinary, but history shows that size and hype do not guarantee strong returns.
At a 1.75 trillion dollar valuation, SpaceX would trade at nearly 100 times sales. That compares with a price-to-sales ratio of 24 for Nvidia, one of the biggest winners of the artificial intelligence boom. SpaceX also lost nearly 5 billion dollars last year.
High Price-To-Sales IPOs Struggle
University of Florida professor Jay Ritter, who studies IPOs, said companies with especially high valuations relative to sales tend to perform the worst over time.
He said many of these companies have compelling stories about why their futures could be bright, but investors must still account for the risk that expectations may not materialize.
Some AI IPOs Have Delivered Big Gains
There have been notable winners among recent large IPOs, especially in artificial intelligence and semiconductors.
Astera Labs has surged more than 700% since its 2024 IPO, while Arm Holdings has risen about 400% since its 2023 debut. Both have easily outperformed the S&P 500.
Not Every Hot Debut Holds Up
Cerebras Systems, another AI chip designer, jumped 52% from its May 14 IPO price. However, it is down about 27% from its first intraday high, showing how volatile even successful debuts can become.
Other high-profile IPOs have disappointed sharply. Didi Global was delisted from the New York Stock Exchange in 2022 after its 2021 IPO and now trades over the counter, with shares down about 74% from the 14 dollar IPO price.
Rivian And Figma Show The Downside
Rivian Automotive has fallen 82% since its 2021 IPO, despite briefly becoming the second-most valuable U.S. automaker. The company continues to lose money on each vehicle it builds and burns around 1 billion dollars in cash every quarter.
Figma nearly quadrupled in its first trading session last July, but its shares are now down 35% from the 33 dollar IPO price. Investors have grown concerned that generative AI could commoditize parts of its design software business.
SpaceX Faces A High Bar
SpaceX’s expected debut comes as investors prepare for other major listings from OpenAI and Anthropic, all benefiting from intense demand for AI-related companies.
But the lesson from recent IPOs is clear: buying into a famous company at a massive valuation can still lead to disappointing returns. For SpaceX investors, the challenge will be deciding whether the company’s long-term story can justify a valuation already pricing in extraordinary success.
