SpaceX it has been fast-tracked to include several major stock market indexes and may ultimately focus its stock performance on the broader fundamentals of the technology sector.
But before SpaceX hits those benchmarks in the coming weeks, market forces — boosted by stock-based securities and leverage by high-net-worth investors — could push the stock price higher. After less than three days as a public company, SpaceX is already up 55% over its initial price of $135.
These aspects of the financial industry have little to do with SpaceX itself, its various industrial sectors or the wider economy.
“It’s going to be very difficult for you to have a bad reputation with this name until you go out and add the Nasdaq-100,” Dan Niles, founder of Niles Investment Management, told CNBC on Monday. “After that, things like ratings, etc., will be important, but as we learned during the meme stock craze, ratings can always be much higher than you think.”
High demand, low stock
Until then, the basic problem is the high level of demand for the stock in addition to the small number of shares available for trading. Only 555.6 million shares were sold in last week’s IPO, representing about 5% of SpaceX’s outstanding stock. An additional 83.3 million shares will be available as a result of a 15% common over-allotment option granted to the underwriters.
An estimated 911 million shares, which is twice today’s total, will open two days after the company’s first earnings report, but that is not expected until early August, according to Morningstar.
Insiders can’t sell yet because of legal restrictions, and many institutional investors who just bought the stock don’t want to.
Stock shortages
The shortfall boosted prices ahead of SpaceX’s entry into the FTSE Russell, MSCI and Nasdaq-100 indexes, which will take place in the next few weeks.
High pressure is building this week as derivatives and other types of secondary financial instruments related to SpaceX go live.
Options on SpaceX stock started trading higher Tuesday, options trader Michael Khouw told CNBC.
“Market makers are buying [a certain number] shares of the underlying stock in all the calls they sell, because that will hedge their exposure in some way,” he said.
Hedge funds and other big money players may also be loading up on the stock so they can sell it back into the market as the indices are forced to buy in a few weeks.
“Price pressure presumably comes from hedge funds, arbitrageurs, and other professional participants who, anticipating demand from passive trackers, collectively buy the entrant early,” analysts at Switzerland-based Concretum Research wrote in a paper last week.
Additionally, SpaceX leveraged ETFs — funds that replicate stock movements by using borrowed money to invest in derivatives, futures and swaps — began trading Monday. Direxion, for example, announced the launch of its Daily SpaceX Bull 2x ETF on Monday.
The bigger the company, the smaller the float
These types of technical pressures can continue even after a company enters the index, and can distort the stock price with smaller floats, such as SpaceX.
“When these automatic, illegal purchases of capital collide with the public float, it creates a serious financial crisis,” Payal Shah wrote to the CME Group in a June 10 letter. “This can cause significant price distortions, forcing passive funds to buy stocks at high valuations shortly after listing.”
After that, once SpaceX has made various indicators, analysts expect the stock price to be more sensitive to both its sectors, as well as to broader macroeconomic factors.
“Equity price growth is likely to be supported by passive fund flows that reflect trends in household savings and asset allocation decisions that are more fundamental than stock-specific,” wrote George Karamanos at Rothschild & Co. in Tuesday’s letter to clients.
There is also the possibility that SpaceX’s stock price could drop significantly following the large amount of media attention the company received while preparing for its public offering.
Analysts at Renaissance Macro Research call this the “hype tax.”
IPOs that open in such a dramatic fashion may soon become ineffective, said Renaissance, which specializes in research on initial public offerings.
“Despite the excitement, performance is often disappointing: from opening trading, the one-year average return was -15.6%, and only 8 out of 20 IPOs posted gains after a year,” analysts led by Jeff deGraaf at Renaissance wrote in a June 11 analysis.
