Here's the Single Biggest Risk With Investing in the SpaceX IPO
Key Points
Investing in IPO stocks always comes with risks.
Key risks for SpaceX's IPO include its steep valuation and the threat from Amazon's Leo unit.
However, the biggest risk of investing in SpaceX's IPO is related to the company's governance.
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We've seen some exciting new stock listings in the 21st century. However, none of them were as big as SpaceX's IPO expected within the next few months. The space technology company is targeting a valuation of around $2 trillion.
Investing in IPO stocks always comes with risks. That will indisputably be the case with SpaceX. But what's the single biggest risk with SpaceX's IPO? It's one that I suspect many investors aren't thinking about.
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The biggest risk
If asked to identify the biggest risk with investing in the SpaceX IPO, I suspect most people would say it's the sky-high valuation. Some would argue that SpaceX isn't worth anywhere near $2 trillion. While I think the company's target valuation is worthy of debate, I don't view it as the biggest risk with investing in the space stock at its IPO.
Others might point to competitive risks. For example, Amazon (NASDAQ: AMZN) recently announced plans to acquire Globalstar to expand the capabilities of its forthcoming Leo satellite internet service. Amazon is a formidable challenger in any market it enters.
I agree that Amazon's new Leo unit, bolstered by Globalstar, could give SpaceX's Starlink a run for its money. However, competition from Amazon or other companies isn't the scariest risk with investing in the SpaceX IPO, in my opinion.
Instead, I think the biggest risk with investing in SpaceX's IPO is... Elon Musk. To be more specific, the fact that SpaceX is expected to go public with a dual-class structure that gives Musk singular control of the company should be worrisome to investors. For all practical purposes, Musk will make all capital allocation, executive hiring, and strategic decisions with minimal required input from public shareholders.
Don't get me wrong. Musk is, without question, a visionary. He has achieved tremendous success with the launches of other companies. SpaceX wouldn't be where it is today without his leadership.
That said, shareholders can't count on Musk putting their interests above his own. Just look at the developments over the last couple of years with Tesla (NASDAQ: TSLA). Musk's political stances antagonized Tesla's primary customer base for its electric cars -- especially outside the U.S. Although I don't think Tesla's underperformance relative to the broader market can be entirely blamed on Musk, his actions have (at least in some cases) hurt the company more than they've helped.
Understand the trade-off
Like many investors, I'm excited about SpaceX's potential. I'd love to see the company succeed in achieving its goal of returning humans to the moon and, ultimately, colonizing Mars.
However, investing in SpaceX's IPO means going along for a ride where there's only one driver. And that driver has exhibited some erratic, impulsive, and polarizing behavior in the past. Those aren't the adjectives most investors would prefer to be applied to the head of businesses they're betting on.
The potential for reward always comes with risks. Investors need to understand the trade-off they're making before jumping on the SpaceX IPO bandwagon.
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Keith Speights has positions in Amazon. The Motley Fool has positions in and recommends Amazon and Tesla. The Motley Fool has a disclosure policy.
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