IPO Liftoff
Initial public offerings, commonly referred to as IPOs, are the sale of shares to the public by a company that was previously privately owned. The largest planned IPO ever is scheduled to take place on Friday, June 12 with the sale of SpaceX shares. Other upcoming IPOs of significant size are expected to occur this year, as well. These would be for artificial intelligence companies, OpenAI and Anthropic.
In regard to these large, highly visible offerings it was anticipated that major stock index providers might relax their criteria for the shares of these companies to be included in their indices. A recent announcement from Standard & Poor’s, the company behind one of the most widely followed stock indices, the Standard & Poor’s 500, has stated it will not relax its index inclusion criteria for the SpaceX offering. These criteria include free float of at least 10 percent of total shares outstanding and four consecutive quarters of positive net income from continuing operations.
Other index providers such as FTSE Russell and MSCI have relaxed their listing criteria and plan to include SpaceX shares in their indices after five and 10 trading days, respectively.
Given this backdrop it is anticipated that SpaceX shares could experience strong post-IPO price appreciation from their offering price as investors attempt to obtain shares prior to index managers incorporating them into their indices.
Pre-IPO, this scenario is more speculative than investment-oriented in nature as it is focused on investors bidding up the price of SpaceX shares primarily in anticipation of massive purchases by funds/ETFs indexed to indices managed by index providers such as those referenced above. Post-IPO investors will begin focusing more on company fundamentals, share valuation, and the firm’s growth outlook which could potentially lead to the shares declining in price if the current price is felt to overstate its value.
For individuals seeking participation in the SpaceX IPO, they may be allocated shares from the offering via a brokerage account. But for those that do receive shares, quickly selling them or “flipping” because of rapid price appreciation may be subject to an underwriter penalty that results in an inability for them to participate in future offerings depending on the posture of the broker allocating the shares.
At BTC Capital, we do not participate in initial public offerings as these situations are often more speculative in nature, as mentioned above, and not congruent with our investment philosophy, which emphasizes long-term focus and strong fundamentals. This is not to say that at some point, after sufficient opportunity to evaluate their financial performance over time, these firms that have launched their shares into the public markets could prospectively work their way into our orbit.
Sources: BTC Capital Management, The Wall St. Journal, Barron’s
The information provided has been obtained from sources deemed reliable, but BTC Capital Management and its affiliates cannot guarantee accuracy. Past performance is not a guarantee of future returns. Performance over periods exceeding 12 months has been annualized.
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