SpaceX Came Back To Earth Right On Schedule
Inside Today’s Issue
Editor’s note: Today’s Porter turns the Journal over to Porter & Co. analyst Jared Simons, who’s been watching the explosion of IPOs – the most recent being Elon Musk’s SpaceX.
They call him “Mr. IPO.” You may not know the name, but Wall Street does.
Jay Ritter has spent more than four decades at the University of Florida’s Warrington College of Business building the definitive database on initial public offerings (“IPO”) – more than 8,500 companies tracked, updated weekly, cited by serious journalists and regulators who touch the new-issue market. When investment banks go to size up a hot deal, they quote his work.
In the spring of 2020, I was a finance student at UofF studying his work. And for the cost of tuition, I got his playbook – his research, his data, his framework – that investors pay billions in hard-earning lessons to learn.
The hallmark example – and the one that towered over the rest – was the Facebook IPO in May 2012.
It was the most anticipated IPO of its era – the biggest tech offering in history at the time. Facebook (then FB) raised $16 billion at a $104 billion valuation, about 25x trailing sales. A multiple that looks quaint next to SpaceX’s $85.7 billion raised at $1.75 trillion – roughly 90x. Facebook was a generational company, a product used by a billion people, priced at $38 a share. Retail investors begged their brokers for shares. CNBC ran a countdown clock.
Four months later, the stock was $17.55 – down 54% from its day-one high.
It took 15 months for anyone who bought that IPO to break even. And here’s the part of the lesson that should not be forgotten: Facebook was one of the greatest businesses ever created. The bulls were right about everything – the product, the moat, the future. And those who bought on the first day still got burned. Being right about the company did not protect them from the price they paid for it.
Look what it’s done since then…
Ritter’s research boils down to two laws:
The IPO “pop” isn’t for you. New issues jump 15% to 20% on average from the offer price on day one. That’s real money – but it’s left on the table for the institutions who received allocations at the offer. By the time you can click “buy,” the discount has already been collected by somebody else.
After the pop, IPOs systematically disappoint. Ritter’s landmark 1991 study found that investors who bought at the first-day close and held for three to five years trailed established companies by roughly three percentage points a year. Why? Because companies don’t go public when their shares are cheap. They go public when their industry is euphoric, and valuations are richest – what Ritter referred to as the “window of opportunity.” You are buying at the moment of maximum optimism, from sellers who know it.
About 18 months after I finished the course in the spring of 2020, the market staged the greatest live demonstration of Ritter’s framework I could have imagined: the 2021 IPO boom. Coinbase Global (COIN). Robinhood Markets (HOOD). Rivian Automotive (RIVN). Record issuance, record valuations, record hype – the widest “window of opportunity” in two decades. After their IPOs…
Robinhood declined 90% in its first year
Rivian fell 88%
Coinbase fell 57%
Lyft – an earlier vintage, but same story – dropped 79%
