Initial public offerings have rocketed so far this year, which is great for SpaceX as it sits on the launchpad for a Friday debut. But be forewarned: A dizzying liftoff doesn't mean the stock will keep flying.
Most IPOs don't. And the bigger they are, the harder and faster they come crashing back to Earth.
This year, the average first-day gain from an IPO's offering price has been a juicy 15.2%, according to Renaissance Capital, the IPO research and investing firm.
And a few blockbuster deals -- notably AI chip maker Cerebras Systems -- have fared even better. Cerebras surged nearly 70% when it started trading May 14.
But it doesn't take long for the pullback to start. After just a month, the numbers show, the average gain was down to 13% above the offering price. Celebras wasn't spared. Just shy of trading a month, the stock now trades at roughly $238 a share, down from $311 on its first trading day -- a drop of almost 25%. The stock popped nearly 20% on Monday -- its largest dailiy percentage gain since the IPO -- after a raft of analysts launched coverage with bullish reports.
This all makes sense because that first trading day is exciting. Then, the excitement wears off.
Many stocks settle in. They even out. But that's far less true with big IPOs, according to strategists at Jefferies.
"Larger IPOs outperform in the first week and first month," they wrote. "That advantage erodes over time."
Since 2000, they said, IPOs with a market valuation above $10 billion enjoyed a 26.5% return on average from their opening price within their first week of trading. By the end of their first full year of trading, the returns fall to just 3.5%.
SpaceX's market valuation is estimated at $1.8 trillion.
Something else to know about big IPOs -- SpaceX and Claude developer Anthropic and OpenAI owner ChatGPT, which are in the pipeline -- is that they raised more money in private rounds of financing at increasingly stretched valuations. That means much of the money for investors has already been made.
Case in point: The NYSE OPEN Venture Capital Unicorn Index, which tracks the private valuations of 50 top start-ups, including SpaceX and OpenAI, is up 35% this year and nearly 130% over the past 12 months.
"I wouldn't necessarily call this a mania, but the enthusiasm for IPOs is very high," said David Shapiro, CEO of OpenVC, which helped create the index.
That's an understatement. With SpaceX's $1.8 trillion valuation, which is almost 100 times trailing revenue for the past 12 months, the mega IPO could be a sign of peak demand for AI stocks -- or even a broader market top given how concentrated major indexes are already in the crème de la crème of tech names -- Nvidia, Amazon, Apple, Microsoft, and Meta, to just tick off five biggies.
"The coming IPO wave may dampen forward market returns, mute further multiple expansion, and possibly interrupt sector trends," wrote strategists at BCA Research.
They threw in another warning: There's a risk of demand for new stocks like SpaceX diluting valuations for existing AI winners.
One money pro, Ron Albahary, isn't only worried about the exorbitant. He's waving a red flag about the very real chance that SpaceX, Anthropic, and OpenAI will create an "impending chokepoint."
"With these mega IPOs and all that new issuance, will investors absorb all of this new stock supply?" asked Albahary, chief investment officer of LNW, a wealth management firm. "We'll be paying attention to SpaceX, Anthropic and OpenAI down the road and what impact that will have on the broader markets."
There you have it. The numbers on gains. The words of an expert. Plus, your own common sense.
Now, make your own call on whether or how much you want to invest. And manage your expectations for how the stock does after Day 1.
