When the biggest IPO launch in history took place earlier this year, investors who got in early to SpaceX (NASDAQ: SPCX) stock might have started counting their chickens.
The first few days saw a buying frenzy. Anyone picking up a stake at the $135 share price in its initial offering would have seen gains that were heading for the moon. In less than a week, the shares had jumped a staggering 63% and Elon Musk’s space technology company looked like it was set for the stars.
What happened next? Well, as the saying goes, what goes up must come down…
Crashing down
Essentially, the stock crashed and crashed hard. A share price that surpassed the $220 mark at its peak went on a rapid decline that shows no signs of stopping. As I write, the share price has fallen to $108, which means a fall of over 50% in about a month-and-a-half.
As the company doesn’t pay dividends, working out the scope of the losses is simple. On a hypothetical ‘lucky’ £7,777 stake, an investor buying in at the very top would now be looking at a stake of just £3,735.
It’s hard not to look at that kind of drop and wonder whether IPO means, in this instance at least, It’s Probably Overpriced!
Interestingly, there will be plenty of winners during the fall. That’s because of the extremely high short interest in the stock. Shorting a stock is a way of making money when the price goes down (the opposite to typical investing). Some reports are suggesting that SpaceX is the most shorted stock in the world. That means more people are betting that it will lose value more than any other.
So that’s the state of play as of early August. But it raises a few questions. Why the massive drop? And could the discounted share price be a chance to buy cheap?
A buy?
The first thing to mention here is that the company is loss-making. The money it generates from its successful Starlink internet service is offset by massive amounts of R&D spending. No profits make a firm hard to value.
And if we look at revenue, then we see the firm looks very expensive with a price-to-sales ratio around 70. This means much of the value in the share price comes down to investor sentiment, which can shift rapidly. And Elon Musk’s companies like Tesla often have a ‘meme stock’ quality that leads to volatility that can be a bit unbelievable at times. All of which is to say: big drops and rises are likely a part of this company’s future.
As for whether this could be a good investment? SpaceX is undoubtedly a world leader – its Falcon 9 spaceship is best in class and the company dominates the space industry as it exists today.
And there’s the rub. How big could this sector grow? Is there really huge demand for sending things into space? Will we really have a colony on Mars of a million people (one of SpaceX’s goals)? For those optimistic about the answers to such questions, I think the stock could be worth considering.
Should you invest £5,000 in SpaceX right now?
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John Fieldsend does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
