The Largest Offering Ever Is Down 49 Percent From Its June High

The Numbers So Far

SpaceX raised $85.7 billion in its June IPO the largest initial public offering ever. Shares closed their first day at $161 up 19 percent from the offering price

They closed yesterday at 114.53. That's about 15 percent below the offer price itself and 49 percent below the high the stock reached on June 16 four days after it began trading

More than a trillion dollars of market value have been shed from the peak. Tomorrow comes the first quarterly report as a public company

Put aside what you think of the company for a moment because the above sequence is worth reading on its own terms. In less than two months without a single earnings release a warning or any trading news this listing has produced both the largest capital increase in the history of the public markets and one of the fastest major drawdowns. Both events concern the same stock during the same eight weeks and nothing in the business changed between them

Two Declines, Two Different Denominators

The gap between those two percentages is the most useful thing in history because it tells you who lost what

The experience of the institutions that were allocated shares in the offer itself is 15 percent less than the offer price. This is a bad result and one that can be survived

49 percent less than the maximum is the experience of anyone who bought in the days after the listing which is when most individual investors can buy anything. The offering is sold to a selected list of institutional accounts. Everyone else buys on the open market afterwards at whatever price the market has decided for that time

If we work backwards in the arithmetic the picture is stark. A 19 percent first-day gain on an offer price near $135 produced a close of 161. The high four days later implies something near 225. Anyone who bought at the top has lost about half their money in less than two months and did nothing more unusual than buying a widely covered company in the week everyone was talking about it

The Pop Was Not a Success

A 19 percent first-day gain is considered a strong debut. It pays to be precise about what it actually represents

The company sold shares at the offering price. Every dollar the stock traded above on day one is a dollar the company did not raise and bid buyers captured. In a raise of this magnitude a 19 percent gap is a huge transfer from the issuer to the assigned accounts

That's the standard criticism of pop and it's only half of it. The other half is what pop does with the price that the public then pays. A stock that opens well above its bid sets a benchmark that has nothing to do with underwriting and the buying that follows is anchored to a number established by a few hours of trading in a supply-limited market

Why the Peak Came Four Days In

A high on the fourth trading day is not a coincidence and the mechanism is more mechanical than emotional

In the days immediately following the listing the supply of shares available for trading is small relative to the company. Almost everything is closed. What floats is the portion sold in the offering less whatever the assigned institutions decide to hold

Demand at that time is at its maximum because the quote is the most covered financial event of the week and any investor who wants exposure has to buy in that very small market. A small float in the face of concentrated attention produces a price and the price is not a considered valuation of the business. It is what becomes clear when a lot of demand is met with very little supply

As attention fades and more shares come into circulation the constraint relaxes and the price falls toward what a broader set of buyers believe the business is worth. That process explains the shape of a huge number of listings and says nothing about whether the company is any good

A Company With No Public Record

The most serious problem is that no one who has analyzed this action has ever seen it reported

An established public company has a history of leading and delivering or leading and failing. Investors know how conservative management is how the business performs seasonally and how reported numbers relate to cash. That history is what makes a forecast more than just a guess

A company that went public two months ago has none of that. The prospectus contains audited historical financial statements and no history of what really matters which is whether this management team tells the market what is going to happen and whether they are right

Therefore the valuation has been determined entirely by a story about the future in the hands of investors with no way to gauge the narrator. Tomorrow is the first piece of information

What the Reported Valuation Assumed

Pre-listing reports indicated the company was weighing a valuation of around $1.5 trillion and it's worth asking what a figure like that requires

A valuation is a statement about discounted future cash flows. At that scale the claim cannot refer to the current business at its current size because no launch and satellite communications business generates cash of the required order. The figure implies the assumption that several huge markets are created and that this company takes over most of them

This is not automatically wrong. Companies have justified valuations like that before and some of them justified much more. What it does mean is that almost none of the value is based on anything observable today so the entire position depends on distant assumptions that a quarterly report can go a long way in either direction

This is the structural reason why a stock like this is volatile. It's not sentiment. When a company's value is primarily in year fifteen small changes in the assumed trajectory through year fifteen produce large changes in its current value

Who Is Left Holding It

The composition of the shareholder base changes rapidly after a listing and explains much of the price behavior attributed to sentiment

The accounts that are allocated shares in an offering do not form a single group with a single intention. Some are long-term holders who wanted a position and couldn't get it privately. Others participate in offerings as a business take the first day's profit and exit in a matter of days. The second group is why the volume in the first week is huge relative to the float and why the record looks completely different a month later

What follows is a stretch where the natural buyers have already bought and the natural sellers have not yet been released. Index funds which are the largest and most constant source of demand in the market generally cannot buy until the company qualifies for the relevant indexes and that takes time and has eligibility rules that a recent listing does not immediately satisfy

Therefore the period between listing and inclusion in the index is peculiar. The most price-insensitive buyer in the market is usually left out the quick money is gone and the remaining holders are discretionary investors who have to form an opinion. This is a smaller and more stubborn market than the company will have in the future and the prices set there should be treated accordingly

The Two Questions Before the Report

Instead of forecasting the numbers the useful exercise before a first earnings report is to decide in advance which numbers would change your mind

The first question is whether growth follows the assumption implicit in the price because a company valued based on a distant outcome has to demonstrate progress toward that goal on a timeline

The second is the direction of losses. A company that invests a lot can lose a lot of money and be perfectly healthy as long as the loss is reduced relative to the income it generates. The same loss with fixed income is a different company

Segment detail is the element most likely to be discretely informative because a company with several businesses at very different stages may report a consolidated number that describes none of them. A mature operation that is growing slowly combined with a young operation that is growing rapidly produces a combined figure that hides both

Guidance is important for a reason that has nothing to do with its accuracy. The first forecast a publicly traded company issues is the beginning of its trajectory. Whether the number is optimistic or conservative is less important than the fact that it exists now and can be compared to reality in ninety days. Companies that refuse to guide at all are making a decision worth noting as it eliminates the only mechanism by which a market can learn to trust them

How I Read a Listing That Has Broken

The habit worth having is to separate the company from the offer because a bad quote and a bad deal are different failures and look identical on a price chart

A stock that has dropped by half from an initial high may be indicating that business is worse than advertised. It may also be saying that the initial price was set in a market with no supply by buyers who had four days to think about it and that the current price is the first honest one

The only way to distinguish them is with information about the business which is precisely what a first results report provides and which no one has had until now

The other habit is to completely ignore the offer price once trading begins. It is a historical fact about a negotiation between a company and its banks. It is not a valuation it is not a floor and therefore a stock trading below it is not cheap

The Case for Buying the Decline

The bearish reading above has an obvious counterargument and deserves a fair hearing

So far nothing in the fall is information about the business. There have been no warnings no exits no lost contracts and no reports. What has happened is that a supply-constrained price found a broader market which is normal behavior for a large listing and is not evidence of anything

If the company is really building what it says then the first two months of trading will look like noise from a distance of ten years and investors who sold at 114 will have sold a compound asset because of one chart. That has happened with a long list of companies that became extraordinary several of which fell by more than half in their first year as public companies

The honest position is that both readings are available and the report is the first thing capable of separating them so it matters more than the price action that preceded it

The Bottom Line

The largest offering ever raised $85.7 billion closed its first day 19 percent above the bid peaked four days later and now trades 15 percent below the offer price and 49 percent below that peak. Those two percentages describe two different groups of investors and the second group is the public. Almost none of the drop is information about the company because the company has not yet reported. A price set in a market almostno floating bid is not a valuation and the first earnings report is the first real evidence anyone will have