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John Healy
Hi, I’m John Healy, chief investment officer of Healy Wealth Management. Today, I want to talk to you about a question a lot of clients are asking us, and that’s SpaceX. Should they buy SpaceX stock or not? The IPO was on Friday. Today is Monday, June 15th. And we’re one day into this. It was offered at 135.
Jumped up to 170. I think it closed around 165. So we’re up about 20%. We don’t invest in SpaceX, we think it’s a speculative situation, but I wanted to bring it up because, you know, clients are asking about it. It’s a very exciting phenomenon. There’s a lot happening with the company. People think of it as the future of artificial intelligence and satellites and rockets.
So it’s very exciting. Elon Musk has a lot of followers and has had tremendous success. So we wanted to give you our thoughts on it. And I think it illustrates what we do here and what we don’t do here and why. So should you buy it or sell it? If you’re watching this and wondering whether it makes sense for you to buy SpaceX or you know someone who’s asking about that, stay with me.
Because by the end, you’ll know exactly what to think about this, and we can help you work through this question personally. Should you buy it and if you should, how much? But first, this is an important distinction I want to make that most people skip. And that’s the difference between making a smart decision and having an expensive mistake.
That distinction changes everything. And so how do you make that distinction? I think you go back to Ben Graham and his classic line, “Thorough analysis, promising safety of principle and adequate return. Everything else is speculation.” That doesn’t mean, and Ben Graham said this. That doesn’t mean speculation is inherently bad, you know, and the innovation and the American entrepreneurial spirit is largely built on speculation.
When you don’t really have a track record, you can’t really know what the future holds, but you put your money up and you go for an idea that you think has great promise. That’s one of the greatest strengths of our economy. You have to know whether you’re doing that or not. I think that’s Ben Graham’s point. It’s not investing, it’s speculating.
And I think the problem is when you start to confuse the two. Most people call speculating investing that they’re investing in something when they’re really just speculating. So let’s be honest and let’s define what we’re doing. And then based on that, decide how much we want to put into each, whether we want to be investing or whether we want to be speculating; how much in each.
That’s the way we think around here. Of course, we don’t speculate with your money. That’s something we would always support you to do with a portion of your money, and we can help you decide how much portion makes sense for you. So let’s think about, again, this IPO question. A lot of people don’t understand what an IPO is.
It’s an initial public offering where a company that didn’t trade in the market, it was a private company, is now going public, selling shares to the public. And what that means is it’s kind of a sale of stock, yes. But it’s also an auction. So you got to remember, when they sell the stock like SpaceX that came out, they were targeting $135 a share.
So there were selling it at $135 a share. But when they put it out in the public, immediately it starts trading and they’re trying to find what is the clearing price. The bankers are trying to find the clearing price for what the market will bear on that day. What is the market price going to be? And that really doesn’t have anything to do with the value of the company.
So the prices that you’re seeing have nothing to do with the value of the company. That’s something that you need to figure out for yourself. What do you think the value is? I think there is some truth to it. What if you own the whole company? What would it generate in cash flows in the future? And that is something that’s very hard to know.
And you just have to have comfort that you have a good projection. The bankers, when they do these IPOs, they build a book of demand from institutional buyers primarily, and then they price it to leave just enough money on the table so that it’ll go up usually, you know, I think they’re targeting around 20% increase on the IPO date.
So this has been a great success because bankers put it out there at $135 a share. It jumped up to over 170, settled by the end of the day around 165. So you’ll hear a lot about how it was a great success. We’ll see what the price does from here on. I would imagine it’s going to keep going up because there’s a lot of enthusiasm.
And of course the index funds are going to have to buy it. There’s a lot of news about that. You’re trying to really think about, you know, the company is overvalued. If you have a conviction that it’s overvalued, and yet you’re going to buy it on momentum because you’re thinking that more people are going to think it’s going to go up.
They call that a greater fool. The fool is going to buy it because even if it’s overvalued, that’s okay. If you just think it’s going to keep going up, you’re going to invest on momentum. We don’t do that. But if you think you’re going to ride that wave, go for it. It’s like playing the lottery or whatever. It’s just something you can do on your own.
We don’t do that. So anyway, that’s the core tension between intrinsic value, the market auction, the company’s value is one number. And what the crowd will pay today is a completely different number. There have been documentation, studies, papers, analysis of this phenomenon in the stock market. One of the most famous is Robert Shiller’s paper in 1981, showing that stock prices are far more volatile than the underlying fundamentals of the businesses can justify, and revolutionary technologies that change the world, like the internet and artificial intelligence.
People who chase the excitement at the peak, they end up getting destroyed in their investments. So railroads, for instance, changed the world. Most railroad companies went bankrupt. Companies like Vanderbilt, who are famous for becoming extremely wealthy from railroads. He acquired them on the cheap when they were going bankrupt. So he didn’t ride the wave of enthusiasm, he bought into the bottom. The auto industry. Between 1900 and 1930, 1800 car companies were started at the beginning, when the car was the new thing. It wasn’t Henry Ford.
I mean, he was one of many. He survived along with General Motors and Chrysler, but to pick the three out of the 1800 was nearly impossible. The airline industry. If you look at the business itself, you haven’t made money in the airlines over the history of the aviation.
Warren Buffett jokes that investors should have shot down Orville and Wilbur Wright at Kitty Hawk to prevent losses. The internet, probably one of the most transformative technologies in human history, and, of course, had the tech bubble with the dot coms in the late 90s. One of the great examples of a bubble. You had companies like Pets.com, webvan, eToys, and many others valued in the billions that were worthless within 24 months of the peak.
Amazon, which was a survivor. It fell 95% from its 2000 peak. The stock was down that much. People who bought in at the top, they never recovered. You could never recover from most of the companies. So how do you how do you pick them? You just have to speculate. Arguably, looking back on it, it’s hard to say. Will you be smart enough?
But it’s arguable that that the greatest wealth creator from the internet was Google, not Amazon. You know, the company didn’t start until late in the 90s. 1998 out of Stanford University was when it began. And so it was a private company up until 2004 when they did their IPO. So that was four years after the peak and the tech bubble.
And so the winner of the tech bubble was Google. It hadn’t even gone public during all that. So, let’s look back at SpaceX versus Google. I’d say, is SpaceX the new Google with AI? I would say there’s a lot of differences. First of all, Google from the very start, was profitable. They had the best search engine, and they just made the right moves to become the dominant monopoly, if you will.
You know, the doorway onto the internet. And so they really owned the internet when you go on, when you went on. Whereas space I mean, I guess you could say they own the satellite business, Starlink, but there are alternatives. And then of course, they certainly don’t own the other business. The biggest investment they’re making in Grok, the artificial intelligence, they don’t even have the best technology right now.
So, that’s a big difference. SpaceX has not made any money. They’ve had a history of losses as a private company. So Google had a clear monopoly. They had clear profits. They didn’t have to invest much money. It was not capital intensive. SpaceX is tremendously capital intensive with the rockets and also building out the infrastructure for artificial intelligence. So it’s a totally different business model, if you will.
And then the valuation is much more hard to stomach. Back when Google went public in 2004, it was after the tech bubble. So no surprise you could get it at a decent price. It was still though. It was trading at 41 times earnings on the offering about 15 times sales, whereas SpaceX, there are no earnings and it’s trading right now over 100, 110 times sales.
So, companies that trade over 100 times sales are clearly overvalued, that the expectation for growth has to be tremendous for years and years and years for that to make sense from evaluation standpoint. So I would say anybody who says that space is undervalued is being prophetic, and they’re just caught up in the hype of what Musk is talking about, getting to Mars and colonizing Mars and all that.
It’s wonderful to think about, but let’s think about the odds. I think it’s very slim that we’ll be able to do that. In any event, you get the point. Price was not justified. The timeline assumed is not long enough, and the certainty that any particular company in this whole artificial intelligence craze will be the survivor is still a huge unknown.
We don’t know which company will be the winner. This whole AI thing, we’re comfortable just waiting and seeing how it shakes out. And maybe a company like Google will come down the road later. Just speculation right now. I’m not going to do it. But anyway, that’s just us. The way we invest, we’re fiduciaries, we don’t speculate with your money, but it’s your money.
And if you want to speculate, just know that’s what you’re doing and just know that you’re paying more than what the company is worth. But what you really need to know is that that can be a strategy. I don’t think it’s a viable strategy, but you do it to really go for it, right? To try to hit the home run.
And what you’re doing is you’re betting that the price is going to stay elevated for a lot longer and continue writing that momentum higher and higher. People around you making money, headlines getting louder, every week that you wait, you feel like you’re making a mistake. You just have to focus on the sentiment and kind of take the temperature of what’s happening.
I would say we don’t do this, but I would say there’s a lot of hype going on right now with SpaceX and it’s probably going to keep going up for a while. I wouldn’t put money in it for you. If you want to do that, great. But let’s talk about what’s really happening. Go back to the late 90s.
I would say 99 through early 2000. People look back and they would say that that was really what is called often on Wall Street, a melt up, you know, it just got more and more ridiculous. I remember I was in the business back then, and I was a value guy, and I would talk about the value companies and how we can’t buy these companies are just ridiculously overvalued.
Cisco at 200 times earnings, for instance, everyone knew it was overvalued. And you bring up the idea that nobody cared. It didn’t matter. Everyone was focused on, you know, what’s going to happen next quarter and if the earnings go up 30%, the multiple is not going to shrink. The stock is going to go up 30%.
So that was what was happening back then. I think with a company like SpaceX, it’s the revenues. If the revenues keep going up, the stock will keep going up. So the melt up in 1999, if you look at this chart, you see the beginning of 1999 through the end, that line there, the doubling line, the 100% gain starting at zero, it goes to 100%.
That was in one year. So you had a doubling of the stock in 1999. And then by you can see it continued up until the early part of 2000, up another 60%. So it was up around 160% from the beginning of 1999. But even if you had made all that gain, you just hung on by the bottom October 2002, you would have lost more than half your money.
So do you really want to try to ride that melt up? It’s very dangerous because you could, you know, it’s going to end up poorly. You just have to get out and everyone’s watching to get out, you know, before it goes down. You’d think looking back, you could have been smart enough to get out as it started to come down.
But it’s just not that easy. The reason you want to remember that you’re speculating is because when you start confusing that you’re investing with speculating, if you think you’re investing, you’re going to hang on and you don’t want to hang on. You’ve got to be ready to get out. So become more of a trader. And that’s not what we do here.
So where does speculation fit in a real portfolio? I’d say there’s a real legitimate place for asymmetric bets, as I mentioned the entrepreneurial spirit. But it has to be money that you can afford to lose entirely. Think of it like back to satellites. There’s the core, which is grounded on Earth, value investing, and then there’s satellite, which is out moonshots, if you will, calculated moonshots that you’re going for.
And those are the speculations. So satellite versus core you hear a lot about that on Wall Street. How much should you have as a speculative satellite on top of your core investments? Rules of thumb, one, just to start with, would be maybe have no more than 10% of your investable assets in high conviction speculations that might be a reasonable boundary.
The danger is, again, when the speculation migrates from the core value approach to the satellite speculative approach, because your excitement starts to override your discipline. Another way to think about this, to help you decide on how much you want to put into this speculation, is if the stock goes to 0 in 5 years, does my retirement plan still work?
I’m not saying SpaceX is going to go to zero, but once you’ve defined it as a speculation, that’s a healthy way to decide how much you should put in it. You really should put no value on your retirement plan. You don’t want to base your retirement plan on any speculations. They should always be sound investments. Your retirement plan needs to be based on a grounded, Earth based, solid financial investment plan, not speculation.
So if you could lose the money, you’d say yourself, yeah, I can use, I could. I’m okay losing that money over the next five years. Then you may be in a position to speculate thoughtfully, but if not, if you’re not willing to lose all your money, then you’re gambling with money that has a job to do for you, and you don’t want to do that.
So these are some things to look at it. Know what you own, know why you own it and how much it’s going to cost you. If it’s a speculation, it’s going to go to zero. Is that going to disrupt your plan or not? That’s a great way to decide how much to put into it. And we’re happy to go over that with you.
It really depends on a financial plan, this SpaceX, if you’re thinking about it, you’re talking to your investment advisor, your financial planner. This is the context that they should be framing your conversation with you. And if they’re not, I think a second opinion from us could be very helpful to you. Conversation with us is free. It’s straightforward, and it might save you from a decision you regret.
So we look forward to hearing from you. Again, I’m John Healy, chief investment officer, Healy Wealth Management. Please like and subscribe to our channel and we’ll see you on the next video.