Our Q&As are emailed in our Saturday Morning Report, find the answer to this question below.
Hi James and team, Love your special insights and consistent advice. My question relates to SpaceX. Will passive funds have to buy shares in order to ‘hug the index’. What is the implication when most shares are held by Elon Musk limiting the available shares in the market. Will the buying pressure send the share price to Mars? Regards Lindsay
Hi Lindsay,
SpaceX listed overnight in what was comfortably the largest IPO we’ve ever seen, raising US$75bn at a valuation pushing US$1.8tn. The valuation is eye-watering for a company not making money, but it’s not the most interesting part of the story.
What matters now is index inclusion, which may be the reason many punters bought the stock.
Under Nasdaq’s new fast entry rules, SPCX could be eligible for Nasdaq 100 inclusion within 15 trading days — meaning a forced passive buying wall could hit as early as late June/early July. If that happens, every fund tracking the index will need to own it regardless of whether they think it’s cheap, expensive or somewhere in between.
Normally that’s not enough to move the needle, but SpaceX is a unique case. Elon Musk and early investors still control the vast majority of the company, leaving a relatively small free float available to trade. In other words, there may not be many sellers around just as a very large group of buyers arrives.
We’ve seen this play out before with another Musk company, Tesla rallied hard ahead of its S&P 500 inclusion in 2020 as investors front-ran the passive buying that was coming. SpaceX could experience a similar dynamic, particularly given the tighter register.
In the short term, technical factors often trump fundamentals. However, investors should remember that passive buying is a one-off event. Once those flows have passed through the system and lock-up periods eventually expire, the market will go back to focusing on the things that ultimately matter – earnings, growth and valuation.
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