Short sellers beware: Elon
Musk’s SpaceX IPO may be too hot to handle.
On the face of it, the company is a natural target for short
sellers — investors who sell borrowed shares to profit from a
future slide in prices.
With an estimated price-to-revenue multiple of 56, eye-popping
even for the fastest-growing companies, and concerns about
governance, it makes for a logical short bet. But the market’s
recent bull run — led by tech giants valued at $1 trillion or
more, of which SpaceX will be one — has been brutal for those
betting against shares.
As a result, few expect investors to come out with guns blazing
against the long-awaited market debut, set to value SpaceX at
$1.75 trillion.
“It’s an extremely risky short play,” said Gabriel Shahin,
CEO of Falcon Wealth Planning in Los Angeles, whose firm has
allowed its investors to buy SpaceX shares on private markets.
He said there is too much interest from bullish investors,
including retail participants, for a safe short bet.
That’s not to say SpaceX does not have some characteristics
that could attract shorts. The company’s valuation exceeds most
other mega-caps, and the economics around its xAI platform and
technologies like orbital data centers are uncertain,
Morningstar analysts said in a recent note.
Wait and See
Peter Hillerberg, co-founder of Ortex Technologies, which
provides stock lending and short interest analytics, said the
high profile of the IPO, retail and institutional interest, and
divergent views on its valuation, are “normally ingredients that
can create a broad spread of opinion, which is often where short
sellers become interested.”
He noted it is too early to gauge actual demand.
One longtime Tesla bear was taking a wait-and-see approach.
“There are large natural buyers in the indexes that will almost
immediately add the stock, most notably the Nasdaq 100,” said
Mark Spiegel of Stanphyl Capital Partners, who considers SpaceX
“grotesquely overvalued.”
The IPO is expected to be the largest ever, at $75 billion, but
its public float would be less than 5 per cent of its outstanding
shares.
Spiegel said he may contemplate a SpaceX short after the “unlock
dates,” when more shares become available for borrowing,
compared with immediately after the IPO, when the cost and
relative difficulty of borrowing would temper shorts. “Very few
people will short an IPO right away.”
While most newly public companies impose broad restrictions on
insider sales for roughly six months after listing, SpaceX has
created exceptions for some participants and plans a phased
release of restricted shares.
The Elon Musk Factor
Shorting Musk’s other company, Tesla, has generally been a
losing bet. On paper, Tesla short sellers have lost $27 billion
since June 2021, including both directional bets against Tesla
shares and index hedges used to account for Tesla’s inclusion in
the S&P 500, according to S3 Partners. Over the last 10 years,
shares have risen more than 2,500 per cent.
“If you think back the experience of all of that was pretty
unpleasant,” said Sam Pierson, director of research at S3
Partners.
Musk himself has waged a highly public battle against those
shorts, which include prominent investors like Jim Chanos, David
Einhorn, and “Big Short” investor Michael Burry. He has taunted
his detractors by selling red satin shorts and even sent a box
of shorts to Einhorn.
In August 2018, Musk posted his infamous “funding secured”
tweet, announcing he was considering taking Tesla private at
$420 per share, prompting a surge in Tesla’s share price and
dealing about $1.3 billion in mark-to-market losses to shorts.
Musk, Chanos, Einhorn, and Burry did not respond to requests
for comment.
The short-seller pain
More broadly, short sellers have been pummeled over the last
decade due to the prolonged bull market, and challenges
intensified with the meme stock mania in 2021.
The Goldman Sachs Most Shorted Rolling Index, an
equal-weighted basket of the 50 highest short-interest names in
the Russell 3000 Index, is up 29 per cent this year, on pace for its
fourth straight year of gains.
The activist short seller playbook was dealt a blow recently by
the fraud conviction of prominent investor Andrew Left, a
development that could have a chilling effect on the practice.
Even investors skeptical of market euphoria may opt to avoid
the challenges of shorting a new issue like SpaceX.
“As a short seller you want to make a case that the stock
has reached a level that’s untenable and that’s much easier to
do with trading history,” said Giuseppe Sette, co-founder of AI
analytics platform Reflexivity.
With stocks trading near highs, short sellers have plenty to
choose from.
“If SpaceX pops 100 per cent on its IPO, is that still the best
short out there in a market where you’ve had absolute parabolic
activity across the board?” said Mike Treacy, head of market
risk at Apex Fintech Solutions, a clearing and custody platform
serving retail brokerages.
“I just don’t think it is.”