Elon Musk Says SpaceX Short-Sellers Have a "Very Low" Survival Probability. Is He Right?

As is often the case following an initial public offering, some investors are betting that the pre-IPO hype surrounding Space Exploration Technologies (NASDAQ: SPCX) -- you know it better as SpaceX -- will continue to fade, letting the stock sink with it.

Specifically, as of the latest count, 165 million SPCX shares have been sold short. In other words, these investors have sold shares of SpaceX they don't yet own, with plans to buy them at a (hopefully) lower price in the future to profitably close out these positions.

Founder and CEO Elon Musk responded, of course. In a post on his social media site X, Musk writes, "The survival probability of firms who maintain a significant short position in SpaceX over time is very low," meaning these risky trades are likely to backfire by virtue of SPCX shares rallying rather than continuing to sink. The higher SpaceX shares climb, the bigger these short-sellers' losses can get. In theory, their potential losses are infinite.

The question is, who's right? Musk, mostly, but there's some important nuance to consider.

Elon Musk, SpaceX CEO. Image source: The White House.

When it comes to Musk, perspective is needed

Let's be intellectually honest here -- Elon Musk isn't warning a handful of investors they're taking a grave risk. He's protecting his company by trying to prop up its falling stock price. Most CEOs and insider owners would do the same.

It just doesn't matter.

See, these short-sellers didn't make their decision on a whim that's going to be unwound by a single vote of optimism, even when that vote is coming from the one person who knows the company best, and especially when that person has the most to gain from SpaceX stock gaining ground rather than losing it (Musk personally owns nearly half of Space Exploration Technologies stock).

Right or wrong, these shorts are likely to stay in place at least until Aug. 4, when SpaceX's second-quarter earnings are scheduled to be released. That will either vindicate them with a sizable setback for the stock, or punish them with a reversal of this ticker's recent weakness.

Statistically speaking, though, the odds are actually in these short-sellers' near-term favor. Numbers from Nasdaq Economic Research indicate that between 2010 and 2020, over half of newly IPO'd stocks were below their IPO price six months after their public offering. Moreover, brokerage firm Edward Jones found that shares of technology companies that went public during this same period were down an average of 14% from their IPO price six months later.

It's not difficult to figure out what happened. This era saw similarly hyped IPOs from then-Facebook (now Meta Platforms), Snapchat parent Snap, and Twitter (now X), just to name a few. As is often the case, the market was too enthusiastic early on ... enthusiasm that faded when cooler heads began to see these companies' actual results and made more reasonable assessments of their stock valuations.

SpaceX is not going to $0

That being said, there's no denying Space Exploration Technologies is a real company; its future existence isn't in question. And even Musk qualified his warning with "over time." From that perspective, any SPCX short-sellers with plans on staying in their trade forever should reconsider that plan.

In the near term, though? Maybe a different story.

Bottom line: There will come a time when this ticker makes a bottom that's never revisited. The trick is just figuring out when and where that is.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.