Why Growth Investors Should Avoid the SpaceX IPO

The upcoming SpaceX IPO is undoubtedly one of the most closely watched in years. The company dominates private launches into space and satellite-based internet, and under the leadership of Tesla CEO Elon Musk, is also a leader in artificial intelligence (AI).

Given that backing, the company plans to issue 555.6 million shares at $135 per share, according to informed sources, and many investors will undoubtedly take part in the IPO. Unfortunately, that arrangement may also sour the more ambitious growth investors on the stock. Here's why.

Image source: The Motley Fool.

The problem with SpaceX's IPO

Growth investors may turn on SpaceX's IPO due to the likely market cap.

Selling the shares at the given price will take SpaceX's market cap to $1.75 trillion. This means that before the public can invest directly in SpaceX, it will already be the eighth-largest company trading on any public market.

Additionally, even though market caps have no theoretical upper limit, a stock's market cap reduces the likely upside. The current leader is Nvidia, with a market cap of about $5.25 trillion. Thus, to match the current leader, it would have to triple in value from the IPO level.

Tripling in value is not a small return. However, growth investors tend to want to buy future leaders when they are small. This was the case with Tesla, since a $10,000 investment on the IPO day is now worth about $2.7 million.

These returns came about because Tesla launched its IPO in 2010, when its market cap was about $2.2 billion, making it barely a mid-cap stock at that time.

Admittedly, capitalizing on such growth takes a level of patience and luck that is hard to achieve even when it is theoretically possible. Still, even with the gains Tesla has earned as a public company, its current $1.6 trillion market cap means it will be a smaller company than the expected IPO value of SpaceX.

In other words, because SpaceX waited until a late stage in its development to launch its IPO, average investors have missed out on a massive amount of gains. Once investors realize this, they may become less enthusiastic about buying SpaceX stock, further dampening demand.

Invest in SpaceX?

Ultimately, investors will have to adjust their expectations when it comes to earning returns in SpaceX stock, and it is an IPO likely to discourage at least one type of growth investor.

Indeed, stocks do not face market cap limits, and one could still earn outsize returns in SpaceX stock. Moreover, an investor cannot realistically expect to perform like Tesla, no matter the market cap on the day of purchase.

Nonetheless, growth investors are not used to a stock's trading history starting as one of the largest companies on the market. Thus, investors who buy SpaceX on the IPO day will have to dramatically lower their growth expectations.

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