While it seems like every retail investor on the planet is going to be fighting over SpaceX shares on initial public offering (IPO) day, I believe this is a classic wait-and-see. Further, aerospace suppliers might be a better way to profit from the SpaceX IPO craze than a direct investment in SpaceX itself.
And remember, Amazon lost more than 80% of its IPO price before it got things right.
It’s better to wait on the sidelines with IPOs
First of all, I generally do not buy IPOs due to the high risk. The typical pattern of the IPO, even if it gaps higher, is that it will trade back down and fill in with longer-term buyers.
I usually wait for the stock to be publicly traded so I can assess its quantitative characteristics such as Alpha, Beta, and standard deviation. Then, I would check the financials and see how they rank in an eight-factor fundamental model that I’ve relied on for more than 40 years.
In short, SpaceX will launch, but when will it hit escape velocity and what will its trajectory be?
There is another item for would-be investors to examine here. The deal has 21 underwriters, including the usual suspects: Goldman Sachs, Morgan Stanley, Bank of America, and JPMorgan.
These firms are expected to receive extraordinary underwriting commissions as part of this deal.
Related: BofA raises red flag on SpaceX, OpenAI IPOs
In my mind, the real question is whether Wall Street is excited about SpaceX on its merits or because Wall Street is going to earn extraordinary fees. And FOMO may cause investors to lose sight of this.
Go for the pick-and-shovel play
SpaceX is often described as a “trucking business” that charges companies and governments to carry satellites into orbit. From this business, SpaceX generates revenue from three main areas: Grok AI, Starlink internet subscriptions, and rocket launches. In the coming years, SpaceX’s Starlink business is expected to continue expanding and could surpass 10 million users this year.
Over time, SpaceX is expected to generate more revenue from internet subscriptions than from rocket launches or Grok AI.
For investors, the encouraging sign is that all three areas of the business appear to be growing. But one reason to wait is to see which business grows faster. If it’s Starlink, that’s a much more predictable business with recurring revenues and predictable margins. If the other, there might be more variance in sales and earnings, making SpaceX a much more volatile business.
This is one of the main reasons I am waiting. Right now, the future of SpaceX is speculative, but in a year, it will be much clearer.
In the end, I would rather buy aerospace suppliers like Carpenter Technology (CRS) or Howmet Aerospace (HWM) than buy the new SpaceX IPO. Both are suppliers of rare metals. They are a classic pick-and-shovel play, and like the suppliers during the California Gold Rush, may earn more than the miners.
Related: Louis Navellier says oil price drop hides bigger opportunity