Key insights
- The article discusses the potential overvaluation of SpaceX's IPO, citing a high price-to-sales ratio and projected losses. The author suggests that the stock is likely to fall due to its valuation, insider unlock schedule, and historical IPO performance. Strategies like buying puts or shorting are considered, with puts offering a hedging benefit against market downturns. The author views this as a potential hedge against market beta, implying a bearish outlook on the broader market if such a hedge is considered attractive.
I think nobody here will debate that SpaceX‘s 1.75T expected market cap is overvalued at a price to sales of 67 to 94x and almost 5bn in losses in 2025.
I have personally never shorted a stock or bought puts, but this is such an impossible valuation and it is set up in such a way that it is almost guaranteed to fall: initial float is as small as possible to get the price really high and the laddered unlock means that shares from insiders and large investors will be hitting the market gradually rather than all at once. On top of that, empirical evidence shows that IPOs tend to fall in price within a few months time, massively underperforming.
The main buyers? dumb retail wsb types, index funds and institutional investors that want to ride the initial IPO pump and dump.
From this perspective, I see two possible options here depending on how confident we are in our predictions:
Option 1 is to buy puts. The benefit is that we can, not only benefit from a downfall of the stock, but hedge our portfolios against market beta. If the market crashes, spaceX will crash with it, providing needed capital to buy the dip in a way that maximizes geometrical returns. If it expires worthless, you keep rolling it. If SpaceX crashes regardless of the market, we benefit anyway. The problem with this strategy will be how expensive those puts are going to be and availability.
Option 2 is to short it. This is virtually free money if we are right, but shorting involves risk of permanent loss of capital. Not when a stock trades at a valuation that is impossible to justify and we are conservative in our margin requirements. However, bitcoin is also worth nothing and it survives on hype . A potential problem here would be availability of shares to short, but this will become easier as liquidity increases.
I was already considering buying puts as a hedge based on the book: Safe haven assets, by Mark Spitznagel. But never got into it. This IPO makes the case very attractive. Wondering what the investors experienced with these tools think.