SpaceX Officially Joined the Nasdaq-100 and Received a $300 Price Target From Wall Street. Here's Why the Stock Is Falling Anyway.

On July 7, Space Exploration Technologies (NASDAQ: SPCX) joined the Nasdaq-100 -- which is the 100 largest non-financial companies by market cap listed on the Nasdaq stock exchange. It also received a $300 price target from Morgan Stanley, one of the Wall Street banks that underwrote SpaceX's initial public offering (IPO).

Being a part of a major index is more than just name recognition. Exchange-traded funds (ETFs) benchmarked to the Nasdaq-100, such as the Invesco QQQ Trust (NASDAQ: QQQ), will begin buying shares of SpaceX. The more indexes a company can be a part of, the more demand is unlocked from ETF inflows -- the crown jewel being the S&P 500 (SNPINDEX: ^GSPC), because the largest ETFs in the world are linked to it.

Here's why SpaceX was added to the Nasdaq-100 so quickly, and why the growth stock is falling anyway.

Image source: Getty Images.

SpaceX will soon be a top holding in the Nasdaq-100

The Nasdaq's new fast-track rules are meant to expedite the inclusion of megacap companies that recently had IPOs. If a company is at least as valuable as the 40th-largest Nasdaq listing, which is a market cap of around $121 billion, it can now be added to the Nasdaq-100 after its 15th trading day. SpaceX has a market cap of around $2 trillion and is the world's seventh-most valuable company -- so it clears the size hurdle with ease.

SpaceX went public on June 12, but markets were closed on Juneteenth (June 19) and July 3. So, it wasn't added to the Nasdaq-100 until over three weeks after its IPO. However, SpaceX's weight in the Nasdaq-100 isn't its market cap. Rather, it is based on a multiple of the float, which is the number of shares available for trading by the public. SpaceX's float is around just 5% of its market cap. But the float could increase rapidly in the coming months.

The vast majority of SpaceX stock is held by insiders who bought in when the company was private -- including institutional investors from previous funding rounds, employees, and founders. SpaceX plans to gradually unlock early-release-eligible shares through a tiered system over the next 180 days, with 20% of shares available for trading two days after the release of its earnings for the quarter ended June 30, and up to 30% if SpaceX's stock price is at least $175.50 per share.

More key unlocking events will occur throughout the summer and fall. And eventually, 100% of the early-release shares will be available for trading by Dec. 9 -- which is 180 days after the IPO date.

Granted, not all insiders will sell their shares and make them available for trading on public markets. Elon Musk and other significant investors have agreed to hold shares for at least 366 days after May 20, the date of SpaceX's Form S-1 filing with the Securities and Exchange Commission. And many early founders still hold large positions in major tech companies, such as Musk in Tesla or Jeff Bezos in Amazon.

Before the recently implemented fast-track process for larger IPOs, the Nasdaq-100 required a free float of at least 10%, meaning at least 10% of the company's shares are publicly tradable. SpaceX should cross that level even if a fraction of early-release-eligible shares are sold and made available on the Nasdaq in the coming months. If I had to guess, I'd expect SpaceX's weighting in the Nasdaq-100 to mirror its market cap by mid-August at the latest.

The market is always evolving

Once SpaceX is weighted by market cap, it will be a top-10 holding in the Nasdaq-100 and account for around 4% of the index. And as more blockbuster IPOs like Anthropic and OpenAI are fast-tracked into the index and reach the float requirements, they, too, could become key holdings. The rapid restructuring of the Nasdaq-100 has undoubtedly piqued the interest of index and ETF investors, especially those who regularly put their hard-earned savings to work in products benchmarked to the indexes.

A common mistake investors will make is assuming that an index is diversified just because it contains hundreds or thousands of stocks. When in reality, the Nasdaq-100 and S&P 500 have become concentrated in a handful of names. And that concentration could increase as megacap IPOs are added.

To stay even-keeled no matter what the market is doing, it's important to heed Peter Lynch's advice about knowing what you own and why you own it. That exercise is straightforward with individual stocks, where an investment thesis can anchor a key holding. But even for ETFs, it's worth recognizing some of the major themes and companies that will drive gains (or losses).

By design, the major indexes can undergo drastic transformations as the economy evolves. A couple of decades ago, major oil companies, industrial conglomerates, and consumer goods companies dominated the largest S&P 500 and Dow Jones Industrial Average (DJINDICES: ^DJI) companies. But the tech sector now makes up a staggering 38% of the S&P 500. And Alphabet just replaced Verizon Communications in the Dow -- meaning that seven of the 30 Dow components have changed seats in the last six years.

SpaceX will continue making waves on public markets

SpaceX's growing share of the indexes and lofty price targets from Wall Street banks have more to do with market dynamics than SpaceX's investment thesis. The recent sell-off in the stock is likely due to fading enthusiasm as investors focus more on SpaceX's fundamentals -- which are shaky given its valuation is in the stratosphere.

For the stock to be a good long-term buy for new investors, SpaceX needs to make progress on its bold plans to launch constellations of orbital artificial intelligence compute satellites and build the world's largest chip manufacturing plant in Texas in partnership with Tesla. Until that happens, SpaceX is best kept on a watch list. And investors who want to avoid the stock entirely may want to double-check that the ETFs they hold don't begin buying SpaceX, especially as its float increases in the coming months.

Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, and Tesla. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.