SpaceX Is Now Public: You Didn’t Miss Out

Paul Winkler: Welcome. This is “The Investor Coaching Show.” I’m Paul Winkler, along with air drummer extraordinaire Evan Barnard.

Evan Barnard: Howdy.

PW: How you doing, man?

EB: Doing good.

PW: Happy to be able to talk. I mean, I’ve been running around like a chicken with my head cut off trying to get some stuff together here.

EB: That’s all right.

Initial Public Offerings

PW: I think we got a few things today. I think we have a little to talk about, don’t we?

EB: There’s plenty to talk about from last week, that’s for sure.

PW: Boy, oh, boy, I guess so. I think not the least of which is an IPO, and as a matter of fact, going to be talking about that, I think, for weeks to come probably. Matter of fact, Joan wants to talk about that on Monday morning.

EB: Fun. Good.

PW: Joan Jones on here, on WTN, so we’re going to be going on there. I’ll have more. I’ll throw some stuff out today. I’ve got a couple of topics.

There’s something that I want to come back to at some point depending on the amount of time. Somebody had posted something online, imagine that, and it was about the unaffordability of real estate.

We have discussed that before, and I thought it might be worth revisiting a little bit for younger people that are saying, “I can’t afford a home.” And some of the thoughts about that, might get into that a little bit as time goes on.

We also have younger people needing to be dependent upon their parents for a lot longer, according to a recent article that was out there. Boomers are hoarding money because they’re terrified of running out. So I think we might have a few things to talk about today.

EB: Are you saying people are still emotional even after the advent of the internet?

PW: No. No, no, no, no, no. No, not people. That’s not normal.

EB: Wow.

PW: So yes, I think let’s start off with the SpaceX thing. The elephant in the room, shall we say, SpaceX IPO. IPO is an initial public offering. That is when a company is first going public.

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Typically, when you buy stock, you’re going to be buying it in a secondary marketplace. 

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In other words, you’re buying it from some other person that bought it first, and then you’re buying it off of that person, and it’s a whole different deal than when you have an IPO.

A lot of people get confused, and there’s just a lot of stuff out there that I would say leads people to believe that they have missed out on something. Let me just put it that way.

EB: If they didn’t get to buy yesterday, yeah.

PW: If they did not get to buy. So I want to set the record straight regarding that because I don’t think that there has been anything in recent months that has made our phone ring more than people asking about this. You may not have had it, but I’ve had a few.

EB: I didn’t get too many, actually. No.

PW: Not necessarily clients.

EB: Oh, yeah.

PW: But it’s been just people just asking that listen to or heard commercials or something like that.

Was the Price Justified?

PW: So anyway, Cramer, of course, has something to say about this. So let’s just hear what Cramer had to say about this.

Jim Cramer: Not as much pie in the sky here as the media would want it to be, David. It’s much more of a nuts and bolts company, and the fact that they can launch once a month means that they’re going to make the projections. I keep coming back to this company and thinking …

PW: So he’s thinking because they’re going to be able to launch this thing once a month that they’re going to make the projections, and it almost sounds to me that he’s saying that the price was justified, if you listen to what he’s having to say about that.

EB: Yeah, probably. Yeah.

PW: Okay. So that’s where he’s coming from there. So let’s keep going.

JC: This is not a miracle company. This is a company that is a great operator in a very tough field that nobody else seems to know how to operate. Too bullish?

PW: Well, first of all, he’s asking if he’s too bullish. I don’t know if bullish. He’s full of …

EB: Oh, that’s a good one.

PW: You like that? You think that’s good? All right.

As you well know, anybody that listens to this show, I’m not a huge fan. I’m a fan of his intellect; I’m not a fan of his philosophy on investing, which is based on the idea that stock picking and market timing work, because clearly, the evidence is that it does not work. I go back to the interview years ago where he was —

EB: With Jon Stewart.

PW: — with Jon Stewart, where Jon Stewart’s just tearing him apart for leading people down this path, and he’s just kind of wringing his hands and going, “We could do better. We could do better.” You could do better by not doing what you do. I mean, really stop.

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Don’t lead people to believe that you can do what you can’t do. 

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The Kellogg School of Management, I like to quote that study because it was just funny, they basically said you’d do better by, they called it the Kellogg Crunch, which I think that’s what makes it fun.

Buying the Stock After the Recommendation

PW: But they basically said you’d do better by selling the things he told people to buy. Why would that be? Well, if he tells somebody to buy something, typically what happens is before he actually talks about it, it’ll be selling at a certain price.

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After he talks about it, it goes up in value. Well, who paid that higher value, but the person that ended up buying the stock after the fact? 

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So let’s say a stock is selling for 50 bucks, and he goes, “Man, I think this thing is worth 70. I think it’s a great company. I think it’s worth 70.

“I think this is going to go to the moon. It’s going to do really, really well. I think you ought to buy it.”

Well, people out there listening go, “Well, this guy seems to be pretty smart and he seems to know what he’s doing. It’s selling at 50. I’ll buy it.”

Well, the problem is that once that information gets out there that he thinks it’s a good stock and people think that he knows what he’s doing, they will pay the higher price, and they may end up paying $60 or something like that. They end up paying that higher price, and then all of a sudden he can come out there on the TV and go, “Hey, look, I told you this stock was going to be a good one.”

What did it do? It went up. Well, why did it go up?

It wasn’t because of the inherent value of the company. It was that demand pop that took place. And who benefited from that, but the people that already owned it before he mentioned that you ought to buy it.

EB: Talk in your book. Yeah.

PW: So that’s the problem that you run into right there.

Revenue vs. Earnings

PW: So to continue on with this …

David Faber: Well, I mean, Laura, you’re talking about 18 billion in revenue, so we can all back into a revenue multiple that’s in the 90s. Lost money, of course.

PW: Now revenue multiple. How much revenue is coming in?

So I own a car business, let’s say, and I sell a car, and my revenue is $50,000. Now look at that, $50,000 for that, that’s my revenue. Is that my earnings?

No. I had to buy the car from somebody else, and then I marked it up. My earnings might only be $3,000 on that sale.

EB: If that.

PW: Well, yeah, exactly. But I’m just using it as any kind of number out there just to throw out the idea. What you’re buying, which is a value when you buy a company, is the revenue is great and everything, but if you don’t have earnings, you don’t have anything, and that’s the problem.

EB: Correct. Interestingly enough, with a lot of companies, but let’s just use SpaceX, since that’s the topic, is a lot of normal metrics that individuals in the industry use to come up with their own answer of what’s a fair value for the company. Of course, the aggregate of all of that creates the market, but things like same-store sales, none of that stuff applies to SpaceX.

And so they are going to have to figure out a few things. I mean, we don’t have this government index of how many feet have we bored a tunnel in the last quarter, those kinds of things.

PW: No, good point. Good point. You’re blazing new territory.

EB: How does the market, with what we believe, how does the market value SpaceX?

PW: Yeah, because we don’t know what the earnings are going to be. We can conjecture.

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There can be conjecture, but you don’t know what the competition’s going to be. 

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One of the big things that they brought up here … well, let me just let them speak for themselves.

DF: Result of the enormous CapEx needs, not of the rocket business as much as, as I just said, of xAI and the needs there for continuing to add computers and everything else, Jim. As is the case with many Musk companies, it is about the future.

It is about orbital data centers and what those are going to mean and a launch cadence that is going to have to pick up quickly. But nobody doubts the centrality of SpaceX’s business to NASA and to putting satellites in space, and nobody doubts the power of Starlink as well.

I think the questions will be about when are these other goals going to be realized? What will the cash flows ultimately look like? The answer there is going to be determined for not for quite some time, Carl, of course, as we will continue to now talk about SpaceX and those opportunities without seeing the numbers yet really accrue from things that again, are years from now.

PW: That’s the problem you run into. You don’t know when this money is going to come flowing in.

The Key Man Issue

PW: Then you’ve got the key man issue. There was a COO of SpaceX being interviewed, and she was making a comment. They were asking her about, “What do you think about him?”

She says, “Oh, he’s the best CEO ever.” You could arguably say, “Okay, maybe he is. Maybe he is the best CEO ever.” I don’t know.

EB: He’s got a trillion dollars to say he’s pretty good at what he says.

PW: Yeah, he’s pretty darn good. I mean, I don’t think I’m going to argue about that. But the issue comes down to, and she made that comment.

She says, “Well, what happens if something happens to him?” The key man issue?

She’s rolling her eyes. “I mean, we’ll go on as a company. It won’t be the same company.”

I think that was the understatement of the year. It won’t be the same company for sure.

Who would run it, and how would they do it? It would be a fraction of the company because he is and has been the company in so many different ways.

EB: Kind of like Steve Jobs back in the day with Apple.

PW: Oh, sure. Yeah, yeah, absolutely. You look at what Musk has done, and you go, “Okay, can somebody else fit in those shoes?” I’d be like, “Well, I don’t know.”

Now, here’s the big thing that I wanted to address regarding this whole thing because people think, Oh, I’ve missed out. I missed out. I wasn’t in there.

They say, “Okay, the stock goes from 135 to 170 in a day,” let’s say. Let’s say it jumps up like that, and they think, Oh, I missed out.

Investors made 26% or whatever overnight bam, it went like that. The reality is most investors don’t get that price. They didn’t get that price.

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Now if you look at who actually did benefit from that, it would be employees that owned the stock for years.

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EB: Yes.

PW: Let’s say if they have an ESOP, and then you have people that have, and they did, and people that own the stock before ESOP. It stands for employee stock ownership plan.

So if I own the stock beforehand and all of a sudden it becomes public, and it shoots up like that. This is something I’ve had happen before, where I’ve had people that come in here and go, “Hey, Paul, I had this stock.”

I remember when UPS went public. When they went public, there was this, “Hey man, this stock has just gone up and it’s gone up and it’s gone up and has gone up. This is going to be the sky’s the limit. It’s going to be wonderful.”

I remember telling one guy, “No, that’s not necessarily what happens after.” It’s contrived a little bit the stock price before because you have people valuing the company that take the information as much as they can to come up with a valuation for the stock before it’s a public company.

But what happens after it goes public? Now you have, instead of a room full of people determining what the value of the company is, you have literally millions.

EB: A million.

PW: Yeah, exactly, all around the world, and they have a little piece of information. Everybody has a little piece of information that other people don’t have, and it makes it a much, much more efficient marketplace.

So in other words, efficient meaning that the price is proper based on all knowable and predictable information, and it can fluctuate like crazy. And UPS did exactly that.

The Lock-Up Issue

PW: After it went public, it fluctuated like crazy, just as I said it would, just because that’s the way it works. What happens is that you’ll have venture capital firms that owned the company years earlier. They benefit from it.

So you saw a lot of commercials out there, people trying to get you to say, “Hey, you can get in it before it’s public.” Who’s going to sell it? Well, these companies, and they’re going to be benefiting greatly from you buying it ahead of time.

Then you get the lock-up issue. This is the big problem that you run into. If you bought the stock, if you own the stock, all of a sudden now you have varying lock-ups.

In other words, you can’t get out. You can’t go and just sell it if it pops up to that next level.

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You can’t just go and sell it because you have to hang onto it for such a period of time, and that is where you run into problems with this. 

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Now there was a relatively small group of people that received IPO allocations. So you had this tiny group of people, and there weren’t that many people that really benefited from that.

There was a guy named Jay Ritter. I was actually doing some research on this. He was University of Florida, and they call him Mr. IPO. I thought, What a great name. 

But he had given a simple example. It was a company sells you $100. Let’s say that it has the share sells for $100.

The stock opens at $130. The media reports a $30 gain, 30% gain, excuse me. But the gain went primarily to people that bought it before.

One of the things that Ritter found in his research, he said, “Historically, investors who buy IPOs after trading begins have often underperformed the broader market for the following years. The average historical return for an IPO, buying an IPO at the end of its first day and holding it for three years was 21% lower than a valuated market index.” That was his research.

EB: Interesting. So still after three years?

PW: Yeah, and it was underperforming. Yeah. And that’s pre-purge.

Waiting for Price Discovery

EB: Again, not that we agree with market timing and a lot of this language, but I finally had heard a commentator yesterday, and this is probably by 2:00 p.m. Eastern, and so it’d been trading a couple of hours, and had settled around whatever, 161-ish, and they were addressing that very topic, not looking three years down the road, but he said a lot of IPOs drop 40 or 50% in the first year.

PW: That’s right.

EB: So if these people are thinking they missed out, all it takes —

PW: You may have missed out on a loss. Yeah.

EB: Yeah, you maybe benefited by missing out on this, I think 50 million shares or something like that. But thinking about the interview when Jim Cramer was talking about this launch calendar or whatever —

PW: Right, right, right.

EB: After what happened with Blue Origin last week or two weeks ago —

PW: I saw that. Yeah. They lost a launch pad too.

EB: So the people that jumped in at $162 a share, all it takes is one rocket of SpaceX to blow up on the pad or 100 feet in the air, and all of a sudden it’s at $130 a share. Now, they can recover.

PW: Or a health issue with Musk.

EB: Yeah, absolutely.

PW: I mean, anything like that. There’s so many different things that can come into play.

EB: You can’t predict the future.

PW: But the bottom line is the media has been talking about this. They treat it almost as if the first day jump is proof of some kind of success for investors that were appreciative enough to jump on board early. The reality of it is, academics look at it and say, “Well, somebody else benefited and they got a bargain price.”

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The biggest gains really come from when this stock was held and it was still private. 

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That’s when the big gains happened. The problem is that for the vast, vast majority of investors out there, unless you’re an employee for the company, you don’t get to benefit from that.

It doesn’t mean that SpaceX won’t do well from here. We don’t know. It’s not that it can’t do well.

I think it’s a little bit shortsighted for some of these indexes to be adding it because we know from the research that they don’t typically do well, and you’ve got to wait for price discovery to take place, and that’s, in an academic sense, what price discovery is.

We have enough data on earnings, we have enough information on sales, we have enough information on cost to know whether we’re paying a fair price. That’s what price discovery is.

In reality, it’s like most investors are standing outside the stadium watching the fireworks after the game’s already over. That’s really what we’re dealing with here.

So don’t feel like, “Oh my goodness, this is something terrible. I missed it.” It goes against what I would consider and what Evan would consider to be prudent investing to jump on these things, and that’s what we have to say about that.

What Capitalism Is About

PW: All right. Paul Winkler, Evan Barnard, “The Investor Coaching Show,” paulwinkler.com. And of course live here Saturdays from 3–5 p.m., but you can subscribe to the podcast at paulwinkler.com or watch the show, actually see us on there doing the show, on YouTube, so you can check it out there, and we’ll have the lovely set to relax about money.

EB: And how much does it cost for them to subscribe to the podcast, Paul?

PW: It just does not cost a thing, although we ought to charge for it. I think it would be a worthwhile investment.

EB: So you’re missing out, people.

PW: It’s like the highest return investment. Can I say that legally?

EB: Well, it’s like Amazon. If the earnings are zero, the PE is infinite or whatever the deal was. The more money they lost, the bigger the company got.

PW: Oh my goodness.

EB: So, I know you have a whole stack there.

PW: I do, but you go.

EB: But while we were talking about SpaceX, I’ve been reviewing some comments on posts that I made, posts that other friends have made, stuff on CNBC and Morningstar and so forth. And I really want to spend a teeny bit of time on this concept of wealth creation, because there was a lot of talk about, okay, a trillionaire.

And it’s kind of like tastes great, less filling. The capitalists on one side of the argument are, this is what capitalism is all about.

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He’s created value for customers, and they perceive that they’re going to make lots of money, and so they’re willing to pay more for those earnings. 

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And all of a sudden, there’s 4,000 new millionaires that were welders and pipe fitters and electricians, and all that have been working for them.

PW: The employees of the company.

EB: I think he said it was either 40 or 400 millionaires that worked for SpaceX.

PW: Yeah.

Wealth Creation

EB: You have this argument on one end of nobody should have a trillion dollars, kind of is the assertion.

PW: I can’t imagine what Massachusetts senator would say that.

EB: Yeah. “Nobody should have that much.”

Well, I’ve got family members in this chat saying stuff like that. Drives me crazy. We all have that branch of the tree that broke off, and they’ve left the reservation.

But they’re creating value for people, and he didn’t steal a trillion dollars from society. This welder didn’t steal a million dollars from society.

And so it’s this concept that you use the term wealth creation a lot. In this industry, “Hey, I’m in wealth creation. How are we going to do that?”

They literally are creating it. And so a lot of people don’t understand ideas, either.

PW: 

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That’s a hard concept for people, the idea that there isn’t a finite supply of money.

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EB: Right. And so people didn’t give Musk a trillion dollars yesterday.

And I think a lot of low information voters, listeners, view it as, Wow, he made a trillion dollars yesterday, but they issued $50 million of stock that they sold at $160 a share. I forget what the number is, but they picked up like $58 billion of new issuance.

But because that value per share applies to these other millions of shares that these employees own, that Musk owned, all of a sudden their wealth exploded, and that’s how capitalism creates wealth. It’s not because they dug more gold out of the ground; they didn’t pump more oil out of the ground. They innovated.

PW: “We’ll take it from some poor African.”

EB: Yeah. They innovated, redid something, did it faster, better, stronger, and all of a sudden, the rising tide lifts all ships.

The Beauty of Capitalism

EB: I want y’all driving around listening to this or on the podcast of how beautiful capitalism is. Nobody forced those people to buy shares of stock. No one forced him to start doing spacecraft. He could have manufactured tires, and he’d still probably be a billionaire.

PW: Yeah.

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You have to come in and make somebody’s life better. You’ve got to look at what it is that their problem is and solve their problem. 

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And by doing that, you benefit from it, but everybody benefits from it. It’s like the idea Alan Greenspan used to talk about this a lot. Fed chairman, and he would talk about immigration policy. And it was incredibly unpopular because people would think, Oh man, you allow immigration and all of a sudden now they’re going to take our jobs. 

And the point that he would make is that if you allow people in the country that are well-educated, that they pull their own weight but they actually create wealth, it’s a whole different thing. And that is where everybody benefits because of the fact that you’ve got a new customer for your business when that person comes in because they’re adding. But that idea of not being a finite amount of wealth out there is something that’s a hard thing to wrap your brain around.

EB: It is.

PW: It really is.

EB: The socialists capitalize on that, by the way.

PW: Oh, of course they do. Yeah, if you want to confuse people, just take something like that and just run with it.

And one of the things I often point out, socialism, communism, are responsible for more deaths than just about anything out there. And yet it still has traction out there.

It just makes me nuts that that’s the case. So I love that the idea that this thing is happening, there are a couple IPOs coming up, the couple of other —

EB: Yeah, that will be interesting.

PW: It is going to be interesting. It’s fascinating.

Will Musk Have Competition?

PW: But the competition too, people are acting like there’s going to be no competition and that Musk will have no competition because nobody else is going to figure it out.

People do eventually figure things out. You don’t know when.

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But the reality of it is part of the reason that it did so well and he is the first trillionaire, so to speak, is because he did crack the code on something. 

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But there will be a lot of people that give it a shot and see what they can do. It definitely reminds me of, Evan, real quick before we go to break here, what this reminded me a lot of is, remember, of all people, Tesla, Nikola Tesla.

EB: Yes.

PW: I remember my son did a paper on this when he was super young, and they had a project that he did, and he did a whole thing on electricity and Edison and Nikola Tesla. And it was the idea of transmitting electricity through the ground, I remember, without the wires. And it was literally we were going to have this ability to do this because he had cracked the code on it but didn’t live to pull it out.

And you just think about what is it that Musk has in his brain? What is it that he’s sitting on? What are the ideas that he has? And I hope, like anything, that he stays around to see this to fruition.

EB: Yeah, It’d be fun to see.

PW: I think it will be really fun to see. That and flying cars.

EB: There you go.

PW: I’m still holding out for my flying car. I’ve been actually watching videos on that recently, and some of the ones that are coming along, they had a company trying to raise money for their flying car. It was just fascinating to watch some of the videos. I can’t remember the name of it.

EB: It really looked more like high-end drones than how we would have pictured flying cars 30 years ago.

PW: Yeah. It’s exactly what it is, and it’s just a matter of time. We are going to be looking at a really interesting future.

EB: You can commute in about 45 seconds from your house to the office.

PW: Yeah. Well, going down to the Cool Springs office during the middle of the day, that’d be really nice.

Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.