PAUL MCBETH: You don’t have to invest in SpaceX but you can’t ignore it

Paul McBeth is the editor of The Bottom Line and Curious News, and previously worked at BusinessDesk for 15 years. He has owned units of the Salt Funds Management’s long-short fund and Milford Asset Management’s active growth and aggressive funds since January 2024. His KiwiSaver funds have been managed by Milford since 2014.

It’s not often that an initial public offering leads the 6pm 1News TV bulletin, but then nothing about Elon Musk’s SpaceX is ordinary.

What started out as a distant hope of reinvigorating a dormant space programme 25 years ago turned into the biggest IPO of all time, mobilising an army of Musk supporters and wide-eyed science-fiction fanboys the world over to make a Mars colony more than just an excellent ‘90s Arnold Schwarzenegger action flick.

And that’s just the rocket-launch side of the business from which it takes the Space Exploration Technologies Corp moniker.

Because the line in the sand for marketland is much more about the oh-so-hot-right-now artificial intelligence industry that’s chewing up more cash than most mid-sized economies – the $1.6 trillion of forecast AI-related capital spending is about three-and-a-half times New Zealand’s $445 billion gross domestic product.

For SpaceX, that’s held within the xAI arm that developed Grok, which is set to chow through the bulk of the US$74.4 billion of net proceeds raised from selling 4.2% of the company’s stock to the public as an army of developers demand ever-greater computing power to drive the AI model.

Meanwhile, Claude developer Anthropic and ChatGPT’s maker OpenAI are having honest discussions with their various bankers about the pros and cons of going public. It’s probably just a matter of time before the investment world starts lining up for the hottest of hot AI names.

It’s the freakiest show

And SpaceX showed its rivals how to do it, with an IPO that was structured in a way to achieve a Goldilocks debut, with a 19% pop rewarding early entrants without going so high as to offend investment bankers for leaving too much money on the table.

The arm-twisting of the index overseers to ensure swift entry to the trillions of dollars that track those benchmarks will provide a helpful support when pre-public shareholders are allowed to sell their holdings in tranches – again to preserve that initial value that so often vanishes in an IPO as the smart money sells into the early pop on the expectation of buying back in at a cheaper price.

The money men and women do like making a buck after all.

For New Zealand’s institutional investors and KiwiSaver managers, the SpaceX IPO was simply too rich.

The bulk of local houses tasked with managing the billions of dollars of everyday people’s savings largely preferred to see how things tracked in the cold light of a public market’s voting machine before deciding whether or not to jump in.

Morningstar Research’s analysts tried to stack up the numbers and could only get to US$63 a share – less than half the US$135 IPO price – on their base case, and even assuming the moonshot lands – something they gave a 7% chance – their valuation stretched to US$154, still below the US$160.95 price the shares settled at on their first day of trading.

It’s about to be writ again

Musk’s enterprises break all the rules when it comes to best practice, which is probably what you’d expect from someone whose pay package includes a stratospheric bonus for establishing a million-person colony on Mars. Rule by committee is great for business-as-usual but doesn’t tend to thrive when chasing the seemingly impossible.

Te Ahumairangi chief Nicholas Bagnall – who led years of outperformance when he ran the Accident Compensation Corp’s investment fund – couldn’t make the numbers stack up for Musk’s electric vehicle maker Tesla, which similarly trades at levels disconnected from the financials it spits out every quarter.

There is a very simple answer for those who simply can’t wrap their head around the cult of Elon Musk – don’t invest in his enterprises.

Sure, the inclusion into the major indices will make that a little bit trickier, but it’s not rocket science in finding a product that suits.

In fact, the first one we checked – Kernel’s Global 100 exchange-traded fund – had no sign of Tesla as at May 31, as an easy alternative to its Global ESG or its hedged S&P 500 ETFs, which both held the EV maker as you’d expect.

And it doesn’t look like too many Kiwis dove in early. There was no sign of SpaceX in heavyweight Sharesies’ top 10 US trades on Friday, while Tesla was the fifth most traded security among Hatch clients, followed by SpaceX in sixth.

It’s on America’s tortured brow

However, the one thing that does seem inescapable is the impact SpaceX and the upcoming AI plays are having more broadly on global stock markets.

SpaceX raised more money in an IPO than ever before, but Google parent Alphabet will take the top billing of equity issuance more broadly when it sells US$84.75 billion of stock to help fuel its AI ambitions, while Meta Platforms is similarly mulling over a big equity deal to keep pace with its peers.

After years of share buybacks and private equity raids on the public markets, Wall Street at least seems prepped for a levelling up of the value of its listed equity.

For the likes of New Zealand, that could go two ways.

A cynic might glumly shrug their shoulders and predict that it will simply lead to more local money being poured into the US, where the prospective gains are simply too big to ignore, and accelerate the drift overseas that was unleashed by the democratising investment platforms and swelling KiwiSaver funds vying to embed themselves in people’s retirement planning.

After all, how can an isolated nation in the South Pacific try to generate public wealth and a capital allocation machine when policymakers dismiss its importance to being a stepping-stone to higher honours in the Cabinet pecking order, and the big institutional money managers are discouraged from veering too far from the pack?

Is there life on Mars?

However, the more Pollyanna-ish among us might pipe up cheerfully to point out that a global return to public markets will simply revive the ambition of local entrepreneurs to stake out a claim on the NZX rather than spend an ever-growing amount of time securing money from private equity bigwigs and venture capitalists, and embrace the benefits that come from being highly visible as opposed to lingering on the costs.

The a2 Milk Co spent much of the 2000s extolling the virtues of the variant dairy protein before Geoff Babidge helped propel it into the big leagues of China’s infant formula market, while Rod Drury’s Xero wrote the playbook on a pre-revenue software company tapping public markets to fuel a global ambition.

The ebbs and flows of market sentiment are just as fickle on the supply side as the animal spirits that drive demand, and local dealmakers have been itching for a long overdue revival in the fortunes of the NZX.

Realistically, it’s hard to see a local listing able to pull off a feat of financial engineering in the same way Musk did by weaponising the indices to create pent-up passive demand for SpaceX.

But then we’re also living in a world where there’s serious consideration of putting people on Mars. If New Zealand lacks the ambition to take greater control of its own destiny, that should probably be an active investment decision rather than a passive one.

Image from nader saremi on Unsplash.