As retail investors scramble for a slice of Elon Musk’s blockbuster SpaceX float at the end of the week, one Australian hedge fund manager is planning to cash in as soon as he can.
Jack Hu, who runs the $45 million Phoenix Growth Fund, built up a 1.7 per cent position in the rocket, artificial intelligence, and satellite company after taking part in a funding round earlier in the year that was based on a SpaceX valuation of $US1.25 trillion ($1.77 trillion).
Hu’s position is expected to balloon to 2.5 per cent of his portfolio based on the company’s current valuation of $US1.77 trillion.
Like all early investors, Phoenix’s stake is subject to a mandatory lock-up period. And while SpaceX hasn’t confirmed the timeframe, Hu believes he will not be able to sell those shares for three to six months.
So he has applied to buy an additional 2 per cent position through the initial public offering itself. If successful, Hu plans to sell those shares in the first few days of trading as passive and benchmark-aware investors send the stock soaring far beyond its listing price of $US135 per share.
“Every indicator points to a very strong open, and it looks like the stock will pop about 20 per cent to $US160 a share,” Hu told The Australian Financial Review. “So if I get any IPO shares, I’ll look to take profits pretty quickly.”
Analysts broadly expect SpaceX’s valuation to surge in its first few weeks of trading, given just 4 per cent of the company’s shares will be available to public investors.
Off the charts
That limited supply is expected to collide with unprecedented demand from passive investors after the stock qualified for fast entry onto the Nasdaq 100, which means it will be included on the tech-heavy index just 15 trading days after the IPO.
The euphoria surrounding SpaceX’s float has divided the few Australian fund managers that own a stake. While Hu is counting down the days before he can sell, others are hoping to ride the stock well into the future.
Pengana Capital, which first invested in SpaceX in 2020 through its ASX-listed private equity vehicle known as PE1, said there was no urgency to exit its position quickly even after its escrow period expires.
“We expect meaningful upside still to come,” said Pengana chief executive Russel Pillemer. “We’ll be subject to a customary lock-up, but when this expires the pace of any sell-down will depend on market conditions.”
Despite concerns about SpaceX’s eye-watering valuation, the IPO is expected to be well supported by the army of retail investors that are scrambling to buy some shares.
Australia’s largest retail brokerage, CommSec, which announced last month that it was selling stock in SpaceX’s float, on Tuesday warned its customers that it was “experiencing extremely high call volumes”.
Wealth app Sharesies, which has more than 1 million Australian and New Zealand users, said it would also be offering local retail investors access to the IPO. Phoenix’s Hu has been told by his close network of brokers that demand for the stock was off the charts.
“Hundreds of international applications are being opened with CommSec every day just for SpaceX, and retail brokers like Morgans and Bell Potter are being inundated with requests,” he said.
While retail buying in the first four weeks of SpaceX trading is expected to be “massive”, Hu warned there would be a glut of stock once pre-IPO shareholders and employees were allowed to start selling their shares after SpaceX releases its quarterly earnings.
A good short
“The business is still very expensive for what it offers and there is a risk that my pre-IPO shares will fall during the escrow period because I’m expecting a pretty sharp correction,” he added.
Research house Morningstar warned investors last week to avoid the float because they risk getting caught up in a wave of selling as insider lock-ups expire. Equity analyst Nicolas Owens said SpaceX was worth about $US780 billion, which is less than half its IPO price.
Plato Investment Management portfolio manager David Allen said SpaceX was a good shorting opportunity once the enormous demand from passive and retail investors started to fade, and the market focuses on fundamentals.
“SpaceX is trading on a price to revenue of 100 times, so if we stress-test that with a few assumptions it shows this will be a short in time,” he said.
The hedge fund manager noted that aerospace and telco companies typically offered margins of about 10 per cent of revenue at best.
“If you assume after 15 years that SpaceX is semi-mature and trading on a price-to-earnings multiple of 25 times, that implies it would need to grow revenue at 28 per cent a year for 15 years,” Allen said.
“Amazon, Alphabet and Meta didn’t do that, and while Nvidia has grown faster than that, it’s not at the 15-year mark yet, so SpaceX doing that would be the most exceptional of achievements.”
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