The City of London is bracing for turbulence as Elon Musk’s SpaceX prepares to list on public markets, a move that threatens to suck British retail investors into the most volatile stock since Bitcoin. Regulators, still smarting from the Woodford debacle, are issuing cautious warnings. But will anyone listen? The allure of rocketing returns is strong, even if the downside risk is a black hole.
The Financial Conduct Authority has its work cut out. SpaceX’s IPO, expected to value the company at over $150 billion, is being touted as the next frontier for retail investors. But make no mistake: this is a speculative bet on a company that, for all its engineering prowess, has yet to turn a profit. Its revenue streams are tied to government contracts and satellite internet subscriptions, both of which are subject to regulatory whims and technological disruption. This is not a blue-chip stock. This is a venture capital play dressed up in a public offering.
British investors, still flush with pandemic savings, are being lured by promises of exponential growth. But the historical data on IPOs is sobering. According to a study by University of Florida professor Jay Ritter, the average first-day return for IPOs since 1980 is 18%. However, long-term performance is far less stellar. Many companies that go public with fanfare quickly lose altitude. SpaceX may be different, but betting on ‘different’ is a fool’s game.
Market efficiency dictates that the price of a stock reflects all available information. Yet information asymmetry is rife here. Musk’s tweets, his SEC run-ins, and the company’s opaque financials create a fog that even the most seasoned analysts struggle to penetrate. For the unsophisticated investor, this is a minefield. The FCA’s warnings, while prudent, are unlikely to stem the tide of capital flowing into this high-risk asset. The lure of a moonshot is too great.
Capital flight is another concern. If British investors pile into SpaceX, money will flow out of UK equities and gilts. The FTSE 100, already struggling to attract buyers, could see further selling pressure. Gilt yields, currently at a premium due to inflation fears, might rise as demand wanes. The Bank of England, already fighting a losing battle against sticky inflation, will not welcome this distraction. A successful SpaceX IPO could siphon billions from London markets, exacerbating the UK’s capital flight problem.
Fiscal responsibility is a foreign concept to Musk. He has built a career on defying gravity, both literal and financial. His ventures, from Tesla to Neuralink, have burned through cash while promising future profits. The market has rewarded this behaviour, but the party cannot last forever. When the music stops, retail investors will be left holding the bag. The FCA’s job is to ensure they don’t lose their shirts, but regulators are always one step behind innovation.
There are parallels to the dot-com bubble. Companies with no earnings could list and see their valuations soar before crashing back to earth. SpaceX has earnings, but they are thin and reliant on a handful of customers. The space industry is notoriously capital-intensive, with high barriers to entry and long lead times. Competitors like Blue Origin and Boeing are circling, ready to poach contracts. The room for error is minimal.
Central bank policy is also a wildcard. The era of low interest rates made speculative bets like SpaceX attractive. But with rates now firmly in restrictive territory, the cost of capital has risen. Growth stocks have underperformed value stocks for the past two years. The Fed and the Bank of England have made it clear that they will keep rates high until inflation is tamed. That is bad news for high-growth companies with no earnings.
So what should British investors do? Caveat emptor. If you have money to burn and a stomach for volatility, by all means take a flyer on SpaceX. But understand that this is not an investment. It is a gamble. Treat it as such. Diversify. Keep your portfolio anchored to assets with real returns, not promises of interplanetary riches. The City has seen this movie before. It never ends well for the last buyer.
The bottom line: SpaceX’s IPO is a story of hubris and hype. Musk has once again captured the public imagination, but the laws of financial gravity still apply. British regulators are right to be wary. The rest of us should be cautious, or risk being left holding the cargo when the rocket runs out of fuel.
