What You 100% Absolutely Need to Know Before Even Thinking About Investing in the SpaceX IPO

It's not often that retail investors get to participate in hot initial public offerings (IPOs), but it looks like they will get the opportunity with SpaceX. However, before you go rushing in to buy shares, here's everything you 100% need to know before you do.

How can I get an IPO allocation?

This is all going to come down to who your broker is, as not all brokers have access to every IPO. While retail brokers will sometimes get IPO allocations, they generally tend to be a very small percentage, around 5% to 10% of the offering.

Full-service brokers typically receive the bulk of these allocations, and they are generally offered to their best clients. If an online broker gets an allocation, you'll often have to go into a lottery to get shares, as generally demand exceeds supply.

Notably, SpaceX plans to make as much as 30% of its IPO available to retail investors, so you could have a much better chance of getting shares than you normally would. You'll still generally need a standard brokerage account and put in a nonbinding indication of interest with how many shares you want and the maximum price you'd pay.

There is then generally a 30-day flipping rule, where brokerages don't want you to sell your shares in the first 30 days. If you do, then you can be barred from future IPO allocations.

What are the odds that the SpaceX IPO goes up?

The odds are actually quite good, although there is no guarantee. Typically, around 75% of IPOs see their share prices increase on their first day of trading. Meanwhile, for big IPOs, the underwriters will generally try to support the stock price on the first day, as it reflects very badly on them if a popular offering goes down right away.

Another thing that generally plays a big role in how an IPO performs early is its float percentage, which is the percentage of shares in the open market versus its overall shares outstanding. When a company goes public with a low float, the shares typically pop, as there just aren't enough shares to go around to meet investor demand, so it naturally pushes the price higher.

According to reports, SpaceX is looking to raise around $75 billion, valuing the company at around $2 trillion. That would be a very small float of just 3.75%.

SpaceX Could Be Given an Index Exception

Typically a stock needs to have at least 10% float and be trading for a while before being included in a major market index like the S&P 500 (SNPINDEX: ^GSPC) or Nasdaq-100. However, the Nasdaq recently made adjustments that could let SpaceX be added to the index with 15 days without meeting the float requirements. The S&P 500, which requires a stock to be public for a year with four quarters of positive earnings, is also considering changing its rules.

This could be a big boost to SpaceX's stock price.

Beware the lock-up period

While low-float stocks often trade well out of the gate, investors need to be wary of lock-up periods. This is when employees and early backers can start to sell the stock, which suddenly floods the market with a new supply of shares.

Each IPO is different, and many large ones have multiple lock-ups. The first lock-up is typically 180 days after the IPO, although some will have early release provisions if certain criteria are met. The details won't be known until SpaceX files its S-1 filing, while the final details will be in its 424B filing.

Image source: Getty Images.

What does SpaceX do exactly?

SpaceX has several businesses. The company was originally founded by Elon Musk, who is also the CEO of Tesla, as a way to lower the cost of rocket launches by being able to reuse as much from them as possible. Today, NASA uses SpaceX for most of its launches, while private companies also use its services to launch satellites.

The largest part of SpaceX's business by revenue, though, is its Starlink satellite internet service, which is estimated to make up between 50% and 80% of its revenue. Starlink provides internet access to around 10 million users around the globe, with the U.S. being its biggest market. Reuters estimates that the company generated between $15 billion and $16 billion in revenue and about an $8 billion profit last year.

However, SpaceX merged with xAI earlier this year to combine two of Musk's ventures into one. xAI makes the Grok large language model (LLM) and also owns X, formerly Twitter. And xAI is a money-losing, cash-burning business that was valued at around $250 billion at the time of the merger.

Should you buy the IPO?

I think investors who want to try to play the low-float dynamics of the IPO can buy SpaceX as a trade, but it's not a stock I'm currently interested in owning over the long term at the moment. Based on reports on its finanicals, the valuation appears high (over 10 times sales) for what is a pretty capital-intensive business.

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.