IPOs have been making headlines recently, with several well-known private companies announcing their plans to go public. Among the companies attracting attention are Elon Musk’s SpaceX, set to debut on the Nasdaq with what could be a groundbreaking IPO. Additionally, artificial intelligence startups Anthropic and OpenAI are generating significant anticipation as they prepare for their upcoming IPOs.
While the excitement surrounding these IPOs is palpable, there are concerns about their potential success. CBC News has delved into the process of a company going public, the beneficiaries of IPOs, and the uncertainties that investors may face.
An initial public offering (IPO) marks the first time a company offers its shares to the public on a stock exchange, a process known as “going public.” By selling shares, a company can raise funds to support its growth. IPOs enable individual or retail investors, who are not professional traders, to purchase shares, giving them ownership in the company and the opportunity for financial gains or losses based on its performance.
The recent surge in interest in these IPOs can be attributed to their unprecedented scale. SpaceX has priced its shares at $135 US each, valuing the company at $1.8 trillion US, potentially making it the largest IPO in history. Similarly, Anthropic and OpenAI are eyeing valuations close to $1 trillion US each. These companies, specializing in rockets, satellites, and artificial intelligence, have garnered immense investor interest due to the belief that their technologies could revolutionize the global economy.
Despite the enthusiasm surrounding these IPOs, some analysts have raised concerns. Research firm Morningstar has suggested that SpaceX may be “significantly overvalued,” valuing the company at $63 US per share. SpaceX itself has acknowledged a history of net losses and uncertainty regarding future profitability.
Stephen Foerster, a finance professor at the Ivey Business School, notes that Elon Musk’s substantial control over SpaceX gives him full authority over operations and strategy, emphasizing the reliance on Musk’s leadership.
Upon going public, the primary beneficiaries are the founders, with Musk holding nearly half of SpaceX shares, potentially making him a trillionaire. Venture capitalists, private equity firms, and employees holding shares also stand to profit. Investment banks organizing the IPO earn substantial fees in the process.
Individual investors typically face challenges accessing IPO shares at the offering price, but recent shifts have allowed more retail investors to participate. For instance, SpaceX has allocated a higher percentage of IPO shares to retail investors, with platforms like Wealthsimple enabling Canadian clients to request shares in the SpaceX IPO.
Following the IPO, shares become publicly traded, enabling individual investors to buy and trade freely. Even those not directly investing in an IPO may indirectly own shares through funds tracking the index where newly listed companies are included.
Investors should be aware of the risks associated with IPOs, including volatile initial trading periods with significant price fluctuations. Early investors may influence prices through selling after a lock-up period, as seen with SpaceX. It may take time for a stock to stabilize post-IPO.
Foerster highlights the risks associated with investing in SpaceX, given its status as a new IPO, untested technology, and current lack of profitability, underscoring the uncertainty and potential for losses.
Past major IPOs like Tesla and Groupon serve as examples of varying performance outcomes, with Tesla experiencing remarkable growth post-IPO, while Groupon saw a sharp decline in value shortly after going public.
