Matt Phillips
3 min read
We can’t speak for the rockets, but the SpaceX IPO has been a masterpiece of engineering.
Why it matters: The offering was structured in a way that deftly manages the mechanisms of supply and demand that markets rely on to determine a company’s true value.
Driving the news: Despite suffering its first down day Wednesday, SpaceX shares remain up more than 40% from their offering price of $135 a share, a run-up that has added some $750 billion to the company’s market value, which was $2.53 trillion at Wednesday’s close.
Between the lines: The forces of supply and demand aren’t produced by immutable laws of nature. Rules and regulations have a lot to do with how markets work. And bankers, book runners and executives can devise all sorts of clever ways to shape and channel these forces in ways they prefer — at least in the short run.
How it works: Here are some of the technical elements known to influence stock prices that featured prominently in the IPO.
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A small float. SpaceX sold only about 639 million of 13.18 billion SpaceX shares in existence, just under 5%. That’s a tiny float — or percentage of stock that’s actually available to trade. The typical public float of an IPO last year was 14.5%. This can result in higher prices because of…
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Constraints on short sellers. Because short sellers need to first borrow a stock and pay for it before selling it short, the smaller supply of shares that can be traded makes it more expensive and less attractive to “short” a stock — or bet that it will fall in value. For decades, academics and market watchers have believed that such constraints on bearish traders keep their views from influencing prices, which can result in market overvaluation. That’s similar to…
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Giant insider holdings. Take Elon Musk, who owns upward of 40% of the stock and as the world’s first trillionaire has little reason to sell very much of it.
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Large holdings by retail traders. SpaceX allocated more than the typical amount of stock to small investors. And retail investors are particularly drawn to the kind of futuristic narratives that Musk specializes in — resulting in high valuations.
Structurally, all of the aforementioned features of the SpaceX offering tend to help support prices — barring any giant change.
Yes, but: There’s another feature of this IPO to consider. That is the staggered end of the so-called lockup, which has kept pre-IPO holders of the stock from selling so far.
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When these lockups expire, it could suddenly mean a lot more shares hit the market.
