SPACEX

It has been 53 years since the New York Knicks last won an NBA championship. A few months before Willis Reed and Walt Frazier cut down the nets, astronauts completed Apollo 17, the final mission of the Apollo program and the last time humans walked on the Moon. It’s only fitting that this Knicks team’s return to the Finals arrives alongside the most highly anticipated IPO of all time, one that represents our next best chance of sending humans back to the Moon (and beyond!).

It’s all very exciting, but it will come as no surprise to our long-term clients that we view the SpaceX IPO through a lens of caution. One can be excited about SpaceX and all it represents, while also being realistic about the risks of participating in an IPO of this size, at this valuation, in this market environment.

IPOs do not happen in a vacuum. They typically occur when sellers believe the market is ready and risk appetite is high. Before evaluating SpaceX itself, it is worth taking a “heat check” (to keep our basketball analogy going) on a market that will be asked to absorb the largest IPO in the history of capitalism.

First and foremost, the IPO window has reopened after several years of dormancy. In addition to SpaceX, we may soon see public offerings from Anthropic, the maker of Claude, and OpenAI, the maker of ChatGPT. Together, these companies could represent roughly $4 trillion of market capitalization and more than $150 billion of equity issuance.

Of course, none of this would be possible without AI. Chip stocks are on a tear, up more than 70% on the year, as trillion-dollar valuations seemingly get minted overnight. The spending boom shows no signs of slowing, with every layer of the AI stack being rewarded for meeting the market’s seemingly limitless demand for compute.

It’s not just IPOs. Some of the biggest players are not only raising substantial debt to fund the buildout, but also raising equity, something unimaginable a few quarters ago. Last week, Google announced an $85 billion raise, and Meta may not be far behind.

So far, the market is eating it up. The result is a level of concentration not seen in decades, with the 10 largest companies now representing roughly 43% of the S&P 500. Add in the potential IPOs of SpaceX, Anthropic, and OpenAI, and the center of gravity becomes even narrower, with an extraordinary share of investor capital tied to successful returns on AI-related spending.

We won’t know who is right or wrong for some time, but we do know that the broader market feels more like the Las Vegas Strip than Wall Street.

According to CBOE data, roughly 60% of S&P 500 index option volume now occurs in contracts that expire the same day they are purchased. Meanwhile, the equity put/call ratio, a widely followed measure of investor sentiment, has fallen to levels more commonly associated with periods of extreme optimism than investor caution. These are signs of a market still eager to speculate, chase momentum, and buy every dip.

Surprisingly, this activity is happening alongside a choppy global macro environment. The Middle East situation remains unresolved, inflation remains a problem, and interest rates are going in the wrong direction. Broader market stress is hidden by AI related gains, and there is real strain in private markets, but as the name suggests, it’s mostly out of the public eye.

A frenetic market does not mean doom is around the corner. It does, however, mean caution is warranted when evaluating something like SpaceX.

SpaceX’s IPO document paints a futuristic picture of the financial opportunities available in space. There may not be a more exciting company in the world. We are talking about rockets, Mars, AI, data centers, national security, and a host of other futuristic-sounding themes, but that’s where the excitement ends for us.

The list of assumptions required to justify a company valued at nearly $2 trillion on $20 billion of sales is long, uncertain, and highly dependent on outcomes that may take decades to unfold. Tesla has already shown that Musk-led companies can trade on future dreams and promises rather than traditional valuation metrics, but at this price, SpaceX requires investors to assume a nearly flawless launch sequence.

Retail demand only adds to the frenzy. In fact, it’s rumored that nearly 30% of the share sales will be going to retail investors, and it’s the most asked about IPO we’ve experienced in a long time. Once lock-up restrictions begin to expire in December, public investors may be forced to absorb additional supply from insiders and early private market holders.

In our minds, this cohort of IPOs may not mark the end of the current investment cycle, but it certainly has the feel of a late-cycle “heat check.” Many of the investors fighting for access to SpaceX have never invested through a true bear market, and this may prove to be another reminder that history does not necessarily repeat, but it often rhymes.

The analogy is almost too perfect. If Brunson and Towns bring the NBA title back to New York after five decades, while SpaceX reignites our imagination about the possibilities of space, there will be plenty of reason to celebrate. But celebrating and investing are two very different activities. The issue is not whether SpaceX is an extraordinary company. It is. The issue is whether investors are being asked to buy an extraordinary company at an extraordinary price, in an extraordinarily enthusiastic market.

_{Compass Wealth Management LLC is a SEC registered investment advisor, clearing transactions primarily through Pershing Advisor Solutions and Pershing LLC subsidiaries of Bank of New York Mellon Corp. This letter is written by Compass for the benefit of its clients and does not necessarily represent the opinions of its affiliated organizations. It is based on information believed to be reliable, but which is not guaranteed to be correct. Nothing herein shall be construed to be a solicitation to buy or sell securities, indicate that past performance is predictive of future returns, or recommend individual investments.}