How does the SpaceX IPO affect long-term investors?
We have received several questions about how upcoming IPOs could affect the broader market and long-term investors. IPOs from high-profile private companies like SpaceX can generate a lot of headlines, so it's important to understand both the opportunities and the nuances involved.
Here are the key perspectives to keep in mind:
Much of the enthusiasm for IPOs is due to the strength of the market this year, since companies prefer to go public when financial conditions are strong to maximize their share prices. So, while headlines are focused on the individual IPOs, this reflects broader positivity which benefits all investors.
One trend over the past decade is that companies have been staying private for longer because they have access to other sources of capital. This means that by the time they do go public, their starting valuations tend to be large. This is why SpaceX, for instance, will be the largest IPO in history. Regardless of when they occur, IPOs are positive because they create new opportunities for a broader set of investors, especially once these companies are included in major indices.
It's understandable that investors often focus on the first few days of the initial public offering, but the reality is that it's better to maintain a long-term view. For example, the gains created by the largest tech companies today have taken decades to play out. While it's tempting to focus on how IPOs perform in the first few days, this is not what supports portfolios in the long run.
Many headlines will focus on the private investors and venture capital firms that were early backers of these companies. It's important to understand that this is only one part of the equation, since the VC business model is to make many risky bets and hope that one is a home run. So, these articles will naturally focus only on the successes, but ignore the investments that did not work out. For long-term investors, it's more important to build a portfolio that aligns with financial goals, which may or may not include companies such as these.
It's also important to maintain perspective around the overall market. The S&P 500 Information Technology sector currently trades at a forward price-to-earnings ratio of around 24x, above its historical average. So, it's important to hold an appropriate portfolio that can take advantage of growth while also managing risk. In recent weeks, for instance, these sectors have been volatile due to the possible impact that higher interest rates might have.
The included chart shows how well public technology stocks have performed based on the Nasdaq Composite index, and also the fact that there have been periods of volatility along the way. While the current wave of IPOs is positive for markets, history consistently shows that patient, disciplined investors who stay focused on long-term goals tend to be better positioned to achieve financial success.
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