SpaceX just went public. Should you buy in?
This morning, SpaceX went public, with potentially the largest IPO in history - an expected total value of around $1.8 trillion.
Trillion, with a "T". Wow.
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OpenAI and Anthropic, the companies behind ChatGPT and Claude, have both announced plans to follow later this year at valuations near $1 trillion each.
Space exploration ๐ and AI ๐ค. Rockets and robots. The two most exciting technologies on the planet, wrapped in the most hyped event in investing - an IPO. And in the optometry forums and online communities I'm in, ODs are asking the questions: How do I get in? Should I get in?
Before you do, it's worth looking at what actually happens to investors who buy IPOs. We have about 45 years of data on this. And it tells a pretty consistent story.
First, About That "First-Day Pop"
You've probably heard that IPO stocks jump on day one. That's often true - but you and I don't really benefit from it. The first-day pop goes to company insiders and the highly valued clients of the investment banks running the deal. By the time everyday investors can buy, that pop has already happened. So the real question is: what happens after day one?
What the Research Shows
Researchers Tim Loughran and Jay Ritter looked at companies going public from 1970 to 1990. IPOs lagged the broad market over that time period - investors in those IPOs earned about 5% per year, while similar established companies returned around 12%. To end up with the same wealth five years later, you'd have had to invest 44% more money into the IPOs.
Dimensional Fund Advisors picked up where that study left off, examining more than 6,000 U.S. IPOs from 1991 through 2018. Same conclusion: a portfolio of newly public companies underperformed the broad U.S. market by about 2% per year. When they extended the data through 2024, the gap got slightly worse.
Why? Dimensional notes that it comes down to what these companies look like. New IPOs tend to be small, expensive relative to their financials, unprofitable, and aggressively building up assets - think of a recent cold-start practice with little profit but buying a ton of new equipment. Those characteristics, combined, have historically been among the worst performers in the market.
The Individual Outcomes Are Worse Than the Averages
Those numbers describe IPOs as a group. When you look at individual companies, the odds don't look good.
In a treasure trove of data on IPOs, Jay Ritter examined roughly 9,000 companies that went public from 1975 through 2021, measuring returns for investors who bought after the first day.
Three years later:
About 60% of these companies lost money. Roughly 38% lost half their value or more. The median IPO was down about 26%. Meanwhile, a small sliver (about 1.8%) gained 500% or more. That's the lottery ticket most people think they're getting with these companies.
Five years out, it doesn't improve:
Nearly 43% lost half or more of their value, and about 60% still lost money overall. The lottery-ticket group grew only slightly, to about 3%.
The characteristics of the companies matter - larger, more established businesses do tend to do better. But it still ends up largely a coin flip.
"But What About Google? Amazon? Facebook?"
Yes, those companies went public and did spectacularly well...eventually. But we only remember the winners. We forget the heaps of companies that lost money for investors and disappeared. There's a lot of survivorship bias at work here.
You basically have to guess which of these companies will not only keep pace with the market, but live up to the enormous hype already baked into their price. Historically, those guesses have been lottery tickets.
One more pattern worth knowing: the periods with the most IPO hype tend to be followed by the worst returns. As Jeff Ptak of Morningstar put it, "The more you covet something, the more you probably should question your desire to own it in the first place."
The Bottom Line
Buying IPOs right after they go public has historically been a poor investment strategy. And if you're a broadly diversified, long-term investor, you'll eventually own these companies anyway once they're added to the broad market. You don't have to guess which lottery ticket pays off.
Now, if what you're really after is a lottery ticket...well, there you go. At least let's be honest about what we're looking for, and size that bet accordingly next to the rest of your wealth.
I can't give direct investment advice here (and you shouldn't take action on what some guy in a newsletter says), but I think the evidence gives us a pretty good sense of direction.
I go deeper on all of this - including how index funds will actually add SpaceX, OpenAI, and Anthropic to their portfolios - in the latest episode of The Optometry Money Podcast (link below ๐). Worth a listen if you've been watching these headlines.
Wondering whether your own investment approach makes sense? Let's talk about it. Just reply to this email (I read every reply), or you can click here to schedule a no-commitment introductory. We'd love to hear what's on your mind and share how we help ODs all over the country navigate those same decisions, and more.
Have a great weekend!
Evon Mendrin, CFPยฎ, CSLPยฎ
New From Our Education Hub
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Podcast Ep. 163: The Biggest IPOs in History Are Here
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Podcast Ep. 162: (Rewind) Should ODs Invest at All-Time Highs?
In this rewind of a popular 2024 episode, I dive deeper into this topic.
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