Excitement is building ahead of SpaceX’s mooted stock market debut, which could mark potentially the biggest IPO of all time in terms of fundraising. What happens in the first few minutes of trading could help to shape investor sentiment and could be as tense as watching one of its rockets prepare for take-off.
Analysis by AJ Bell of how 10 of the biggest ever IPOs performed on their first day of trading tells an interesting story. The findings illustrate why many investors might be jumping up and down to take part in the IPO offer rather than wait for the shares to start trading on the market.
We found the 10 gigantic IPOs analysed saw their shares trade 14.2% higher on average at the market open on day one versus the IPO price. It meant someone who took part in the IPO offer made the type of return in a matter of days that an investor may only hope to make in a year from stocks and shares.
Why do investors buy into IPO offers?
Companies offering their shares for public trading for the first time often raise money as part of the listing process. Investors place orders for stock in the IPO offer and their allocation is typically confirmed just before the shares start trading on the market. They are getting in ahead of the crowd and there can be good reasons to do so.
IPOs are often priced below intrinsic value as a sweetener to encourage investors to take the risk of supporting a fundraise. There is a term called ‘the IPO bump’ which describes how new listings often jump by 10% or more as soon as they hit the market as valuations adjust.”
Do all IPO offers instantly reward investors?
IPO offers don’t always come up trumps for investors. For instance, two of the top 10 IPOs of all time began trading below their IPO offer price on their first day – Saudi Aramco and SoftBank. On a broader basis, there are examples of big losses as soon as new shares hit the market, such as Deliveroo whose stock got off to a terrible start, falling 15% at the market open on the first day of dealings in March 2021 and down 41% in less than a month*.
Even stocks that initially did well can do a handbrake turn, such as Facebook (now called Meta Platforms) which jumped 10.7% when the market opened on its IPO day in May 2012. Four months later, the stock was trading at half its IPO offer price.
*Source: LSEG
What are the other risks for IPOs?
Investors don’t precisely know what they will pay in an IPO offer. There should be an indicated valuation range, but not a guaranteed price. If demand for a stock is high, investors might end up paying more for a company than they think it is worth.
There is market speculation that SpaceX could be worth $1.75 trillion at listing, equal to 83.3 times estimated 2025 sales. That is more than three times as much as Nvidia’s rating based on revenue for its past financial year and latest market value.
Some investors might justify a high valuation for SpaceX based on rapid earnings growth potential, others might argue it doesn’t deserve such a rating. Should it list on an expensive valuation, it could put SpaceX at risk of suffering a large share price decline on the slightest bit of bad news.
Dan Coatsworth: Head of Markets
Dan Coatsworth is AJ Bell's Head of Markets. Dan has been with the company since December 2012 and has more than 18 years' experience in the industry, following the markets and all things investing. He...
