The SpaceX IPO Is the Biggest in History. That Doesn't Automatically Make It a Good Investment.

On the Mount Rushmore of highly anticipated initial public offerings (IPOs), SpaceX stock must be one of the four "presidents." Elon Musk's rockets, satellites, and social media conglomerate will finally sell 555.5 million shares to the public on June 12 at an IPO price of $135, listing on the Nasdaq Exchange under the ticker SPCX.

The company is reportedly looking to raise $75 billion at an implied market capitalization of $1.77 trillion, making this the largest IPO in history. Combine that size with rising enthusiasm for space equities and some investors' reverence for Musk by way of Tesla, and it's understandable that, forgive the space pun, enthusiasm for the SpaceX share sale is out of this world.

The SpaceX IPO is generating buzz, but patience may be a virtue. Image source: Getty Images.

With select IPOs, anticipation and enthusiasm can be helpful, but the blush wears off quickly. Think of it in terms of kids anticipating opening their holiday gifts. They're excited in early December, but by the end of the month, their holiday zest wanes. Likewise, size attracts market participants, but none of these factors guarantees IPO success.

The SpaceX IPO faces a challenging history

History shows that many IPOs, including many in recent years, deliver impressive first-day performances. That's great for some market participants, but not necessarily for long-term investors. In fact, market participants who believe in SpaceX's five-year potential should consider not buying the stock on its first trading day.

There's precedent for approaching the SpaceX IPO with some restraint. Keith Lerner of Truist Securities recently examined post-IPO trends for 30 well-known stocks, and the case for not rushing into SpaceX grows stronger in light of those findings. Just 43% of the stocks were higher six and 12 months after their IPOs, with median losses of 9% over those periods.

Making matters worse was the average first-year maximum drawdown of 55%. Mind you, this isn't a list of flimsy fly-by-night companies. The first-year drawdown offenders include Meta Platforms (formerly Facebook) at 54% and Palantir Technologies at 53%. Robinhood Markets was an egregious offender at 90%.

The point is, if history holds up, SpaceX may be great on its first trading day, maybe even for a few days or weeks. On the other hand, patient investors may be able to get better pricing on this space stock by waiting.

Will this time be different? Maybe

One of investing's most-used sayings is, "History doesn't always repeat, but it often rhymes." In SpaceX's terms, that may imply that, like Facebook, Palantir, and Robinhood, Musk's company's shares will struggle for a while.

However, there's a wildcard with SpaceX: fast index inclusion. Benchmarks provided by FTSE Russell, such as the Russell 1000 index, can add SpaceX after just five trading days. The stock is poised to appear in the Nasdaq-100 index after just 15 trading days, and it could be in the S&P 500 by December, which is noteworthy given that companies usually have to wait at least a year to be eligible for S&P 500 inclusion.

So passive funds tracking those indexes and the active managers benchmarking to those gauges will be forced to buy SpaceX, potentially propping up the stock in the process. But that's not an invitation to buy SpaceX on Day 1. The supply of shares will increase as soon as August, as various "unlock" periods commence, possibly diluting public investors in the process.

Savvy long-term-minded investors should think this one through carefully.

Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms, Palantir Technologies, Tesla, and Truist Financial. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.