‘Extreme concern’: 2 big reasons why the SpaceX IPO is worrying some stock market watchers

SpaceX’s initial public offering is just one day away, and it is widely expected to be the largest on record.

At its IPO price, SpaceX is expected to be valued at around $1.75 trillion—a staggering sum that would put it firmly in the rankings of the world’s most valuable companies. The IPO may also help make SpaceX founder Elon Musk the world’s first trillionaire. 

But as the company’s stock listing nears, several lingering concerns about the offering have been expressed by market watchers, from analysts to lawmakers. Here are two of the most prominent.

Valuation concerns

SpaceX’s IPO price is expected to be $135 per share. That puts the company’s total valuation at around $1.75 trillion, an astonishingly high sum for any company.

At that valuation, it would instantly make SpaceX the world’s eighth most valuable public company, just behind Broadcom, which currently has a market cap of $1.77 trillion, and just ahead of Saudi Aramco, which currently has a market cap of around $1.74 trillion.

The thing is, many industry analysts and retail investors have expressed concern over this sky-high valuation. The main reason for these concerns is that while most other companies in the trillion-dollar club have firm profitability behind them quarter after quarter, SpaceX reported a net loss of around $4.9 billion last quarter.

Only one of its divisions, Starlink, generates a profit. As the Motley Fool noted, the company as a whole is “deeply unprofitable.”

In other words, many analysts and investors feel that SpaceX’s IPO valuation prices in a lot of faith that the company will succeed on several fronts in the years ahead. However, as with all things in life, whether that actually pans out is uncertain. 

Some high-profile analysts have argued that SpaceX’s IPO is highly overvalued. This includes analysts at Morningstar, who have said that SpaceX actually has a much smaller fair market value of around $780 billion, notes CNBC.

If this analysis is right, and more investors come to realize after the IPO that SpaceX may be overvalued, it could send the shares sinking. That’s why Morningstar has said it thinks “investors will have opportunities to buy the stock at more attractive levels after the IPO.”

Governance concerns

When a company goes public, its shareholders, ostensibly, get to make some decisions about how the company is run. Shareholders exercise these decisions through their voting rights, which are conferred through the shares they own.

SpaceX, like many public companies, offers two classes of shares: Class A and Class B. Class A shares are the type that mom-and-pop retail investors can buy, and Class B shares are reserved for SpaceX insiders and bigwig investors like Musk.

And when it comes to governance, this dual-class structure takes away a lot of power from individual investors. That’s because, as noted by the Wall Street Journal, SpaceX’s Class A shares confer only one vote apiece on their owners. But Class B shares confer 10 votes apiece. 

As the WSJ notes, “Musk holds around 94% of Class B shares.” This makes it nearly impossible for retail investors to take action against Musk if they decide they do not like how he is running the company.

For example, if retail investors were ever to decide they want SpaceX to have a different CEO, Musk could almost certainly defeat their motion through his Class B voting rights alone.

Elizabeth Warren urges SEC to delay SpaceX IPO

While retail investors and industry analysts have been among the most vocal in raising the above concerns about SpaceX’s IPO, yesterday a powerful lawmaker also reasserted her longstanding concerns about SpaceX’s public offering. 

On June 9, Senator Elizabeth Warren of Massachusetts sent a letter to Paul Atkins, chairman of the Securities and Exchange Commission (SEC), urging the agency to delay the SpaceX IPO.

According to Warren, a ranking member on the Senate’s banking committee, the IPO “appears to present significant risks to ordinary investors and their retirement savings – while carrying enormous advantages for SpaceX insiders, including senior Trump Administration officials.”

Warren said her “extreme concern” revolved around the company’s valuation, its governance, and also a concern that “major stock market indexes are being rigged in a way that would force millions of investors in passive index funds . . . to invest in SpaceX and face exposure to SpaceX’s significant risks with no choice in the matter.”

The SEC declined to comment. SpaceX did not immediately reply to a request for comment.

With the company’s first public trading day less than 24 hours away, it seems doubtful that the SEC will put a halt to SpaceX’s IPO. SpaceX is expected to begin trading on the Nasdaq under the ticker SPCX tomorrow.

Disclosure: Fast Company‘s parent company is owned by Morningstar founder Joe Mansueto.