SpaceX Just Erased $600 Billion in Market Value in 3 Days. Here's What Long-Term Investors Should Know

Space Exploration Technologies’(NASDAQ:SPCX) post-IPO surge has rapidly unraveled.

After Elon Musk’s space company jumped as much as 67% in the first three trading sessions to peak at $225.64 on June 16, SpaceX has given up most of those gains in the subsequent three sessions. The stock closed down at $154.60 on Monday, the lowest closing price in its short history, and was just 3% above its opening price of $150 on June 12. The pullback wiped roughly $600 billion off SpaceX’s market cap, which reached $2.6 trillion last week.

Reports from Bloomberg that the company was seeking to raise $20 billion in a bond sale seemed to weigh on the stock on Monday.

The volatility in the post-IPO trade is normal, but if investors are feeling nervous about the price action, there are a number of things they should keep in mind.

Image source: SpaceX.

High expectations are baked in

Most IPO stocks are volatile out of the gate, especially ones as hyped as SpaceX. Additionally, SpaceX is likely to have even bigger swings than the average IPO stock because it bypassed the typical price discovery process with its bankers, choosing instead to just set a $135/share price for the IPO.

SpaceX also debuted at a sky-high price-to-sales ratio of roughly 100, making it one of the most valuable companies in the world despite being unprofitable.

In other words, high expectations are baked into the stock, and it’s being valued as if it has already achieved or is close to achieving some of its bold goals, like colonizing Mars.

Price equilibrium will take time

Most IPOs swing significantly in their opening weeks and months as the stock searches for price equilibrium or the point at which buyers and sellers balance each other out.

Typically, this process takes about three to six months to play out, but SpaceX’s is likely to take longer.

The company is taking an unusual approach to its insider lockup expirations. Instead of setting one date, normally 180 days after the stock begins trading, SpaceX is allowing insiders to sell the stock in 15 stages in a timeline that stretches out over more than a year. The float will increase by multiples over the next year as lockups expire, likely adding to the stock’s volatility and putting downward pressure on it.

What it means for long-term investors

As a recent IPO, the fundamentals that long-term investors typically use to evaluate a stock aren’t really relevant at this point.

Instead, SpaceX stock is likely to be driven by hype and sentiment in the near future.

The long-term case for SpaceX, on the other hand, relies on distant goals like colonizing Mars and sending data centers into space. The company also said it had an addressable market of more than $28 trillion, nearly equal to U.S. GDP.

In other words, SpaceX has made huge promises, and it will take time to deliver on those. In the meantime, other concerns are likely to move the stock.

If SpaceX executes on its vision, it could be a winner for long-term investors, but at its current valuation, I’d prefer to see the stock move significantly lower before calling it a buy. The stock could still fall well below its IPO price, and long-term investors should be prepared for the volatility to continue.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.