A SpaceX rocket crashed into the moon at 2 a.m. Wednesday, leaving a massive crater and another piece of “space junk” on its surface. But that will be only the second-biggest dump of SpaceX’s week.
On Thursday, nearly a billion shares of SpaceX, held by early employees and pre-IPO investors, will finally break free from their lockups. The shares, totaling around $100 billion at current prices, are more of a supply shock than the entire IPO itself. And while analysts worry that it will cheapen the stock—or, as Morgan Stanley suggests, provide an opportunity “to gain exposure to a potential generational compounder”—SpaceX avoided the worst of this moment by quietly lining up its buyers before the lockup clock even started running.
The natural pressure
Every IPO eventually meets this moment, cautioned Gil Luria, head of technology research at D.A. Davidson. Early employees might believe wholeheartedly in the company, but after spending decades with most of their wealth tied up in a single stock, they may want to diversify—buy a house, maybe.
That transfer from private-company insiders to public-market investors is the “natural course of business,” he said—but, by definition, it puts pressure on the share price as fresh supply enters the market.
The bailout
Within 25 days of listing, four index providers—CRSP, FTSE Russell, MSCI, and Nasdaq—added the stock, forcing passive funds inside millions of 401(k)s to buy in. While it’s unclear how much SpaceX stock passive funds took on, JPMorgan estimates that the Nasdaq inclusion alone transferred $4 billion of SpaceX into passive accounts. Luria calls the accelerated path into the indexes “a little bit of a bailout.”
Without it, he said, SpaceX would face the lockup expiration with “the supply from lockups” but none of the demand generated by index funds or the arbitrage traders buying ahead of them. Instead, the company secured “very substantial demand from index inclusion” precisely at a time when “there’s a lot of supply coming.”
It was “very important,” Luria added, that SpaceX and its bankers negotiated the accelerated path into the indexes before the IPO. The arrangement effectively spread out the buying—avoiding one dramatic surge—meaning the selling at lockup expiration has a cushion it otherwise wouldn’t have had.
How lucrative that cushion was for the people who saw it coming: Two trading teams at the hedge fund Millennium made about $3.6 billion in June from these so-called index-rebalancing trades.
On Thursday
Luria said he doesn’t think every employee or early investor will race for the exits Thursday. Investment banks, he said, often favor shareholders they expect to hold for years, and if an investor jockeys for access to pre-IPO shares and then “behaves badly,” they could get shut out of future IPOs. Plus, it’s hard to think of more loyal followers of the Elon cause than the ones who spent their careers building the company.
But ultimately, stock-picking is less about what you believe in the present than what you think other investors will believe about the future. And Tuesday’s earnings represented Musk’s last chance to project a positive future before Thursday’s selling event, with Musk telling investors that SpaceX could exit the year at a staggering $100 billion revenue run rate. But the report also exposed how much of that future now depends on enormous spending on artificial intelligence—$15 billion in a single quarter—while raising new doubts about whether Starlink is beginning to slow.
The stock fell another 9% on Wednesday, extending a brutal summer that has erased half of its value since the IPO. Analysts across Wall Street doubled down anyway, with JPMorgan even lifting its price target from $220 to $240.
“You never bet against Elon,” Luria said, calling it a “truism in the investing community” after years in which investors lost enormous sums betting against Tesla.
This story was originally featured on Fortune.com