By Justin May, Portfolio Manager

SpaceX had its IPO on June 12^th. It was the largest IPO ever. The company raised $75 billion at a $1.77 trillion valuation, making it one of the world’s top 10 most valuable companies: more valuable than Walmart, Tesla, Meta (Facebook), and Samsung. It’s the first of a few mega-IPOs expected to launch this year, with OpenAI and Anthropic both potentially listing before year-end at trillion-dollar valuations.

Our clients did not buy any shares. In fact, our clients have never participated in an IPO through Old Peak. Here’s why.

1. IPOs, on average, do worse than the market in the first year. The charts below provide evidence. Companies usually have a choice on when to list their shares – especially now, when there are plenty of sources of private capital. So, the owners will typically wait until they can tell a very attractive story – to get the highest price possible.
2. Frequently, the shares of IPO companies get hit particularly hard when insiders are allowed to sell. Usually only a modest percentage of the company is sold in the IPO. Most shares normally have a 6-month lockup, which makes it easier to sell the IPO. But after 6 months, much more supply enters the market, and the stock price often drops. The chart below shows one example from Alibaba’s record-breaking 2014 IPO. SpaceX may well be an even uglier case study. It initially offered only 4% of its shares, but by year-end, 40% will be available to trade.
3. The key to long-term investing success is diversification. Buying an individual stock is the opposite. Sure, you can buy a few shares if you want to have some fun, in the same way you can go to Las Vegas or wager online. But that’s not serious investing; it’s playing.

Below is a graph showing how Alibaba’s stock performed following its IPO and share unlocks. The stock dropped over 50% from its peak to the final unlock a year after the IPO: