SpaceX Stock Could Soar to $5 Trillion on IPO Day, According to a Wall Street Expert

SpaceX's initial public offering (IPO) is scheduled for Friday, June 12. The company will list its stock on the Nasdaq exchange under the ticker SPCX. It will be priced at $135 per share, giving SpaceX an initial market capitalization of $1.77 trillion. But that figure could be much larger by the time the market closes.

Institutional and retail investors are ravenous to own a stake in Elon Musk's company. In fact, demand is so great that CNBC's Jim Cramer -- a former hedge fund manager who earned returns of 24% annually over 14 years -- says SpaceX could "end up with a $5 trillion valuation on the day it comes public." That implies about 180% upside from its IPO price.

However, Cramer also thinks the SpaceX IPO could be destructive for the rest of the stock market. Investors who want to participate may have to raise money by selling other stocks, and Cramer sees prime targets in Amazon, Microsoft, and Nvidia, three companies that account for nearly 17% of the S&P 500 (SNPINDEX: ^GSPC).

Here's what investors should know.

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The SpaceX IPO could force big investors to sell other stocks

SpaceX hopes to raise a record $75 billion from its IPO, roughly triple the previous record of $26 billion set by Saudi Aramco in 2019. That money needs to come from somewhere, and cash levels among institutional investors and high-net-worth individuals are near historic lows.

In May, institutional investors had just 3.9% of their portfolios allocated to cash, according to a survey from Bank of America. That is just seven-tenths of a percentage point above the record low. At the same time, high-net-worth individuals (i.e., with at least $3 million in assets) had less than 10% of their portfolios in cash, the lowest level since the survey began in 1999.

So what? Fund managers and wealthy individual investors who want SpaceX exposure will need to sell stocks to raise capital. Large stocks like Amazon, Microsoft, and Nvidia are likely outlets for that selling pressure, because many investors already have a big percentage of their portfolios allocated to those companies. That could put downward pressure on the S&P 500.

History says SpaceX will underperform the S&P 500 over the long term

SpaceX plans to raise $75 billion by selling 555,555,555 shares at $135 per share. However, the company will have a market value of $1.77 trillion when it goes public, meaning its float (the number of shares available for public trading) will account for just 4.2% of total shares outstanding.

The price of any stock depends on supply and demand. Initially, the combination of a very small float and insatiable demand could drive SpaceX stock much higher, perhaps to $5 trillion, as Cramer predicts. But the float will increase as restricted stock gradually becomes available as the lock-up period ends over the first 180 days.

Selling pressure will likely increase as more shares become available for public trading, which could cause SpaceX stock to sink. The drawdown could be particularly steep because the company has an absurd valuation. It reported $19.3 billion in revenue over the last 12 months, meaning its initial price-to-sales (P/S) ratio will be about 92.

For context, Palantir is currently the most highly valued stock in the S&P 500 at 65 times sales. SpaceX's valuation means the stock will immediately be about 40% more expensive than the most richly valued stock in the S&P 500. That is not sustainable, especially when the company reported relatively weak sales growth of 15% in the first quarter.

Indeed, Morningstar analysts value SpaceX at $780 billion based on a discounted cash flow analysis, which represents a 56% decline from its IPO valuation of $1.77 trillion. History offers another warning: The top 10 U.S. IPO stocks on record (as measured by initial market value) have underperformed the S&P 500 by more than 120 percentage points since listing shares, according to Barron's.

Here's the big picture: The combination of immense demand and a relatively small float could drive SpaceX stock much higher initially. In that scenario, the broader market may suffer as investors sell other stocks to raise capital. But SpaceX will become increasingly vulnerable to drawdowns as its float increases, and history says the rocket and satellite company will underperform the S&P 500 over the long term.

Bank of America is an advertising partner of Motley Fool Money. Trevor Jennewine has positions in Amazon, Nvidia, and Palantir Technologies. The Motley Fool has positions in and recommends Amazon, Microsoft, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.