SpaceX has been fast-tracked to enter several major stock market indexes and that could eventually ground its stock performance in the broader fundamentals of the tech sector.
But before SpaceX goes into those indexes in coming weeks, market forces – amplified by derivative securities based on the stock and maneuvers by big-money investors – could drive the stock price much higher. After less than three days as public company, SpaceX has already soared 55% above its $135 initial public offering price.
These financial industry factors have little to do with SpaceX itself, its various industrial segments or the broader economy.
“It’s going to be really hard to be negative on this name until you at least get out to the Nasdaq-100 add,” Dan Niles, founder of Niles Investment Management, told CNBC Monday. “After that, then things like valuation, et cetera, are going to matter, but as we learned during the meme stock craze, valuations can always go much higher than you ever imagined.”
High demand, little stock
Until then, the basic issue is the high level of demand for stock on top of a tiny amount of shares that are available to trade. Only 555.6 million shares were sold in last week’s IPO, representing about 5% of SpaceX’s outstanding stock. Another 83.3 million shares will become available as a result of the usual 15% overallotment option given to underwriters.
Roughly 911 million insider shares, amounting to twice today’s public float, will unlock two days after the company’s first earnings report, but that’s not expected until early August, according to Morningstar.
Insiders can’t sell yet due to legal restrictions, and many institutional investors who just bought the stock don’t want to.
Stock scarcity
This scarcity is driving up prices ahead of SpaceX going into the FTSE Russell, the MSCI and Nasdaq-100 indexes, which will happen over the next few weeks.
The upward pressure is intensifying this week as derivatives and other kinds of secondary financial instruments related to SpaceX go live.
Options on SpaceX stock started trading Tuesday in large volumes, options trader Michael Khouw told CNBC.
“Market makers buy [a certain number] of shares of the underlying stock for every call they sell, because that will hedge their exposure somewhat,” he said. “That very act is putting buying pressure on the stock.”
Hedge funds and other big-money players are also likely loading up on the stock so they can sell it back into the market as indexes are forced to buy in a few weeks.
“The price pressure hypothetically comes from hedge funds, arbitrageurs, and other sophisticated participants who, anticipating the passive trackers’ demand, collectively buy the entrant ahead of time,” analysts at Switzerland-based Concretum Research wrote in a paper last week.
Additionally, SpaceX leveraged ETFs – funds that multiply the movement in a stock by using borrowed capital to invest in still other derivatives, futures and swap agreements – started trading on Monday. Direxion, for example, announced the introduction of its Daily SpaceX Bull 2x ETF on Monday.
Big company, tiny float
These sorts of technical pressures can continue even after a company enters benchmark indexes, and can distort the price of stocks with tiny floats, such as SpaceX.
“When this mechanical, price-agnostic buying of passive funds collides with a constrained public float, it creates intense liquidity strain,” Payal Shah wrote for CME Group in a June 10 note. “This can result in significant price distortion, forcing passive funds to buy shares at elevated valuations shortly after listing.”
Afterward, once SpaceX makes it into various indexes, analysts expect the value of the stock to become more sensitive to both its sectors, and broader macroeconomic factors.
“Share price momentum is likely to be underpinned by passive fund flows that reflect household savings trends and asset allocation decisions dependent on thematic fundamentals rather than stock-specific ones,” George Karamanos at Rothschild & Co. wrote in a Tuesday note to clients.
There’s also the possibility that SpaceX’s stock price could fall significantly following the huge amount of media attention the company received in the run-up to its initial public offering.
Analysts at Renaissance Macro Research call this a “hype tax.”
IPOs that open so spectacularly can soon underperform, said Renaissance, which specializes in researching initial public offerings.
“Despite the enthusiasm, performance often disappointed: from the opening trade, the median one-year return was -15.6%, with only 8 of 20 IPOs posting gains after a year,” analysts led by Jeff deGraaf at Renaissance wrote in a June 11 analysis.
– Justin Zacks contributed reporting.
