Nearly 1 Billion SpaceX Shares Unlock On Aug. 6. Here's What Retail Investors Should Do.
Key Points
Only a fraction of SpaceX's outstanding shares trade on public markets at the moment.
Understanding the company's lock-up periods is important, but there are limitations to what investors can do to take advantage.
Space Exploration Technologies (NASDAQ: SPCX) just conducted one of the most successful IPOs in history. After setting an initial IPO price of $135 per share with a market cap of $1.77 trillion, share prices shot higher during the space stock's public debut. At one point, SpaceX stock soared above $225 per share.
The exuberance was short-lived. Just six weeks after its IPO, SpaceX's stock price is now below $117 per share. That's about 13% lower than the company's original IPO price.
Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a "Double Down" signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same "Total Conviction" signal is flashing for a company 1/100th the size of Nvidia. Continue »
SpaceX is expected to announce its first-quarter earnings on Aug. 4. I don't expect many surprises on a material level, but I do expect CEO Elon Musk to do his best to hype the struggling rocket stock. That's especially true given another major event that will come just days after the second-quarter earnings release.
Image source: Getty Images.
SpaceX investors must understand the company's lock-up schedule
When SpaceX went public, less than 5% of its total outstanding share count was made available for public purchase. Analysts call this freely traded allotment of shares "float." Having such a small float naturally makes a stock more volatile, as supply or demand can quickly outstrip the other. Many experts argue that this is exactly why SpaceX's stock soared so much in its debut. Many of those same experts also believe the small float was partly responsible for SpaceX's sudden valuation slide in more recent trading sessions.
While a large float can help a stock reduce volatility over the long term, increasing the float can add short-term selling pressure. This is exactly what SpaceX shareholders should be wary of ahead of Q2 earnings. That's because a critical lockup period will expire, allowing certain shareholders to sell their stock on public markets for the first time.
Following Q2 earnings, potentially another 20% of SpaceX's outstanding shares will be made available for public sale. That could more than quadruple SpaceX's available float.
Many Wall Street analysts are concerned that the massive increase in float will create an overhang on SpaceX's stock price.
"We believe that most of the available shares will come to market, because the existing sellers have low cost basis and long holding periods," explains Nicolas Owens, an analyst for Morningstar. It's possible, however, that most of the potential overhang has already been priced into SpaceX stock. "It's conceivable that a good deal of the recent slump in SpaceX stock is precisely in anticipation of the dilution from the lockup," Owens adds.
Ultimately, this will only be the first major increase in SpaceX's fleet. After third-quarter earnings are announced, another huge block of shares will be made publicly available, followed by the expiration of another lockup period after fourth-quarter earnings are revealed. In mid-2027, Musk will be cleared to sell his entire stake, totaling an astounding 6.4 billion shares.
None of these lockup periods should be a surprise to investors. All were clearly outlined in SpaceX's IPO prospectus. While the magnitude of SpaceX's float increases is unique, lockup periods are largely standard for IPO stocks.
Investors should monitor SpaceX's key lockup dates. However, an investment in the company should be based on long-term fundamentals, not on short-term changes in its float.
Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.