If You Have $1,000 to Invest Today, Should It Go Into SpaceX or the S&P 500? History Has a Clear Answer.
It’s been quite some time since there has been an initial public offering (IPO) with as much hype as Space Exploration Technologies’ (NASDAQ: SPCX) (SpaceX) offering on June 12. It was the largest IPO in history, and over the three trading days that followed, the stock rose about 33%.
Many investors (and Elon Musk loyalists) are eager to get a piece of SpaceX, expecting generational returns if the company fulfills its ambitious long-term plans. But is now a good time to get in, or is your money better off in a broad index like the S&P 500 (SNPINDEX: ^GSPC) right now?
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What can you expect from SpaceX’s stock?
Nothing is ever guaranteed in the stock market, but SpaceX’s run since its IPO was widely expected. Its float (the number of shares available to the general public) has historically been small relative to its size, and many retail investors want a piece of the pie, driving up demand and prices.
History suggests this momentum isn’t likely to last in the long term, however. Part of it is the decline in hype and fear of missing out (FOMO). Another part is insiders (employees and investors) finally being able to sell shares after their lock-up periods are over.
After years of waiting for their equity to be more than just a number on paper, or finally receiving a return on investment, insiders typically offload a large number of shares shortly after they’re legally allowed to do so. More shares hitting the market typically means the stock will have a drawback.
Is the S&P 500 a better option?
Research shows that companies such as SpaceX — with a float of less than 10% and over $100 million in revenue — have market-adjusted returns of -5.3% over the three years after their IPO. Granted, the S&P 500 could underperform over three years, but it’s much more likely to outperform.
If your goal is a quick flip (it shouldn’t be), SpaceX is much more likely to deliver it than the S&P 500. It’s also much more likely to lose money in the coming months. If your goal is to grow your money in the coming years with as little risk as possible, the S&P 500 is by far the best choice.
The S&P 500 also lets you kill two birds with one stone, since it will eventually hold SpaceX shares. Before it happens, SpaceX will need to trade on the market for at least a year and show consistent profitability, but it’s almost guaranteed to happen eventually.
