The highly anticipated SpaceX IPO could become one of the most valuable public offerings of all time, prompting S&P Global to change its ETF allocation rules. That kind of move has one market expert pushing back.
SpaceX Could Break S&P 500 Precedent
SpaceX, led by billionaire CEO Elon Musk, boasts a valuation ranging between $1.5 trillion and $1.75 trillion. It’s targeting an initial public offering on June 12.
This valuation would make the space company one of the most valuable in the world and put pressure on the largest stock market indices to include shares alongside the likes of the other top valued global companies.
Freedom Capital Markets Chief Market Strategist Jay Woods, who has spent more than 25 years working on Wall Street, argues that SpaceX should get "no fast pass" or "express ticket" to inclusion in the S&P 500 or Nasdaq 100.
Woods wrote in a weekly newsletter that he sent an official comment letter to S&P Global, the company behind the S&P 500 Index.
To qualify for inclusion in the S&P 500, tracked by the SPDR S&P 500 ETF Trust (NYSE:SPY), companies must:
- U.S.-listed stock
- Market capitalization of $20.5 billion or more
- Have positive reported GAAP earnings in most recent quarter and trailing four quarters combined
- Have public float of at least 50% of shares outstanding
- Have adequate liquidity
- Publicly traded for 12 months or more
Of these criteria, SpaceX at IPO open will fall shy of the profitability requirement, float requirement and the publicly traded for 12 months requirement. In other words, it meets only around half of the requirements.
"Every single one of those criteria matters. This isn't bureaucratic red tape. It is the product of decades of hard lessons about what makes an index durable, reliable, and trustworthy for the trillions of dollars benchmarked against it," Woods said.
No ‘Minor Tweak’
Woods notes that the S&P Dow Jones Indices is proposing changes to its rules to accommodate SpaceX for inclusion. The governing body proposed cutting the inclusion period from 12 months to 6, eliminating the public float requirement for companies considered "megacap," and eliminating the profitability requirements for any companies that would rank in the top 100 of the S&P Total Market Index.
"That's not a minor tweak. That is a fundamental rewrite of what the S&P 500 has always stood for."
The Nasdaq 100, which is tracked by the Invesco QQQ Trust (NASDAQ:QQQ), has already made its changes. SpaceX and other new companies that would rank in the top 40 by market capitalization can be added in 15 days, versus the current three-month requirement. SpaceX chose Nasdaq for its listing after this rule was changed.
What SpaceX Inclusion Means
Woods uses the float problem to illustrate why the rules should remain unchanged. Musk maintains control with a 42% stake and 79% of voting rights.
The company will list only about 5% of its public float on IPO day through a proposed $75 billion offering.
Woods cites Bloomberg Intelligence analyst Rob Du Boff, who estimates that S&P 500 index funds could have to acquire 19% of SpaceX's available float within six months. Russell 1000 and Nasdaq-100 tracked funds would need to acquire 24% of available shares.
"This is where the principle matters more than any single company," Woods says. "There should be no fast pass to index inclusion, full stop."
By bending the rules for SpaceX's index inclusion, Woods argues that forced buying does not reflect investor conviction.
"Using the world's most trusted benchmark as a vehicle to guarantee a wall of forced buyers for a company that hasn't yet earned its seat at the table should not be one of those pathways."
Woods says investors can buy SpaceX stock if they choose. Funds, he says, should not be forced to bend the rules to include the well-known space company.
Investors who have shares of ETFs and mutual funds that track the S&P 500 would automatically become SpaceX shareholders, whether they want to or not.
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