IPOs have been making headlines recently, with several well-known private companies announcing their plans to go public. The spotlight has been on Elon Musk’s aerospace company SpaceX, which is gearing up for what could be a groundbreaking initial public offering (IPO) on the Nasdaq. Additionally, there is significant buzz surrounding artificial intelligence startups Anthropic and OpenAI, both of which are eyeing public listings in the near future.
The excitement surrounding these IPOs is hard to miss, but there are questions about whether they will live up to the hype. CBC News delved into the process of companies going public, who stands to gain, and whether investing in these IPOs is a safe bet for potential investors.
An IPO, or initial public offering, marks the first time a company sells its shares to the public on a stock exchange, allowing individuals, also known as retail investors, to purchase shares and own a portion of the company. This process helps the company raise funds for expansion and growth.
The attention on these IPOs stems from their unprecedented scale. SpaceX has set its share price at $135 US, valuing the company at a staggering $1.8 trillion US, potentially making it the largest IPO to date. Similarly, Anthropic and OpenAI are aiming for valuations close to $1 trillion US each.
The appeal of these companies lies in their offerings of cutting-edge technologies such as rockets, satellites, and artificial intelligence. The immense interest in these IPOs is being driven by investors who believe that these innovations have the potential to revolutionize the global economy.
Despite the enthusiasm, some analysts have raised concerns. Research firm Morningstar has suggested that SpaceX may be overvalued, with a valuation significantly lower than the IPO offering price. SpaceX itself has acknowledged a history of losses and uncertainty about future profitability.
According to Stephen Foerster, a finance professor at the Ivey Business School, Elon Musk’s substantial control over SpaceX gives him full authority over the company’s direction, making investors essentially bet on Musk’s leadership.
When a company goes public, the primary beneficiaries include founders like Musk, who stands to gain billions from his significant stake in SpaceX. Venture capitalists, private equity firms, and employees holding shares also stand to reap substantial rewards. Investment banks organizing the IPO earn substantial fees from the process.
Individual investors typically face challenges in acquiring shares at the IPO price, but there has been a recent shift towards allowing more retail investors to participate. SpaceX, for example, has allocated a higher percentage of IPO shares to retail investors than usual. Online brokerages like Wealthsimple are facilitating Canadian clients’ requests for SpaceX IPO shares, although allocation is not guaranteed.
Following the IPO, the shares become tradable on exchanges, allowing individual investors to buy and trade them freely. Even for those not directly investing in an IPO, owning shares indirectly through index funds is becoming more common, with the Nasdaq streamlining the inclusion of newly listed companies in its index.
Investing in IPOs carries risks, including significant volatility in initial trading, potential price fluctuations driven by market demand, and post-IPO selling by early investors. SpaceX investors, for instance, will face a lock-up period for major stakeholders, including Musk, which can affect stock stability for an extended period.
Foerster emphasizes the risks associated with investing in SpaceX, citing the company’s IPO status, untested technology, and lack of profitability as key concerns. He cautions that investing in IPOs comes with uncertainties and the possibility of losing the entire investment.
Looking at past major IPOs, Tesla’s IPO in 2010 at $17 US per share has seen substantial growth, with early investors reaping significant returns. Conversely, Groupon’s IPO in 2011 experienced an initial surge followed by a sharp decline in value in the subsequent years.