Should I Buy the SpaceX IPO?
Everyone is talking about the SpaceX IPO and asking whether they should buy the stock or not.
In this blog post we will be talking about the current market conditions and whether we will buying the SpaceX (SPCX) IPO.
A Great Time to Use a Great Swing Trading Strategy
We just saw several big big breakouts over the past few days. Ideal high tight flag breakouts and the best earnings gap trades are suddenly on fire again.
The SpaceX IPO introduces about $75 billion in more supply to the overall stock market initially. The lockup will be phased in over several months and you can check it out in the S1 filing.
A rising expected Fed Funds rate due to a strong jobs report and other better than expected economic numbers hit stocks hard last week. Large funds also needed to unload tech and space stocks to make room for a stock that is about to go into the Nasdaq 100 among other indices.
The higher future fed funds rate and selling ahead of SpaceX led to an over 8% drop in the Nasdaq from high to low in just a few trading days.
The good news is that this tests the best stocks. The ones that hold up well near highs are often the ones that surge ahead of a rebound in the overall market.
Our top strategies on high tight flags and earnings breakouts often excel before we start to see the market turn. Over the past week we have seen ATEX, CASY, CRDO and other big high tight flag breakouts. The ones that do not meet all the rules in the high tight flag videos are still hit or miss along with the lower priced stocks.
How We Will Handle SpaceX
SpaceX is a very innovative company doing very impressive things such as landing rockets backwards after launching satellites and other space vehicles. This drastically reduces the cost of launching space vehicles.
However, the most valuable business right now for SpaceX is Starlink. The satellite communication service great for tough to cover areas of the world for those needing internet and cell access. They have over 12 million subscribers currently and its rapidly growing. This is about $1.19 billion in operating profit for Q1 this year alone.
Getting close to a $5 billion per year operating profit per year already if we extrapolate that over 4 quarters. Subscribers have about doubled in just over a year. The problem is that average revenue per user is falling as they cut prices to build out the network more quickly ahead of the IPO.
This business alone is worth hundreds of billions of dollars potentially. The other businesses are unprofitable so far but do have potential. The valuation is based a lot though on the track record of Elon Musk and Tesla. Tesla is one of the top performing stocks of all time.
The IPO valuation is $1.75 trillion. So its a bet that Starlink can gain traction in more traditional busy areas where other cell phone services are sold. Many analysts say 40 million may be the cap for its network without having a competitive offer to a typical cell service in a metropolitan area. Over 20 million requires significant satellite upgrades.
So you really have to believe in the longer-term vision of the company and be prepared to wait many years for the company to achieve its goals.
However, the stock could fly on day 1. IPOs are rigged in the bulls favor for the first few months of trading. Once you get to the first earnings release and closer to lockup expiration, a fresh IPO like this normally starts to trend lower if it even got off to a strong start in the first place.
So buying ahead of the IPO date is often a good option with the very best IPOs.
Tesla was a great buy both ahead and right after the IPO date. However, it had a $1.5 billion valuation. Not a $1.75 trillion valuation like SpaceX. Big difference.
Trading SpaceX
Ken Fisher famously said that IPO stands for “Its Probably Overvalued”. Over the years, we have found this to be true with most IPOs. A lot of fresh IPOs later turn into penny stocks.
So far SpaceX is about 4x over subscribed which is a good sign for SpaceX over the next several weeks. And the lock up expiration is phased in over many months.
As we were saying above – with IPOs, the market is sort of rigged in favor of the bulls for the first few months usually due to the lockups and the difficulty in shorting shares of a fresh IPO. However, most IPOs are duds anyway and lose you money.
Its only the exceptional IPOs that are worth trading or investing in. And only while the odds are stacked in our favor for the first few months when swing trading.
A few great IPOs form a good IPO base in the first several weeks to few months and continue a long-term trend higher. Most of the best companies that come public start to fall, however, just ahead of lockup expiration. And usually they are difficult to trade within the first 4 to 5 years of trading except those first few months ahead of lockup expirations.
The exceptions include Tesla and Zoom which was profitable with strong growth when it came public. This was a good one to trade early in its life as well. Google is another example. But most take a while to digest all the shares that come to market during and a few weeks ahead of lockup expiration.
In the next boot camp we will go over how we trade the best ones within the first few months. The worst thing you can do generally is play an earnings breakout (post earnings) on these. With fresh IPOs, the big first earnings beat is normally a dinner bell for the sellers.
Trading Cerebras
One look at Cerebras (CBRS) and you can see what can happen to a good IPO prospect. CBRS gapped much higher than the IPO price that was set before it started to trade. Those that got in ahead of the IPO saw their shares gap much higher but then fade over the weeks ahead.
However, the market was preparing for a much larger IPO in SpaceX during this time. Also, the Nasdaq was due for a pullback anyway after a strong run off the March lows. So this could have accounted for the recent CBRS weakness post IPO date.
So this time could really be different. CRBS could still form a great IPO base after falling to near the IPO price. But SPCX could form a high tight flag right out of the gate and make another move higher from there. Time will tell.
We will look at the first half hour or 1 hour consolidation and see how it looks tomorrow. A breakout out of this opening range could be interesting but you have the first Fed meeting with Warsh at the helm next week.
Normally breakouts are somewhat muted ahead of a key Fed meeting. And Warsh introduces what the market hates most – some uncertainty you typically have with a new Fed chair.
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