THE ECONOMIST: Can the stockmarket swallow Anthropic, SpaceX and OpenAI?

They promise to be the biggest stockmarket debuts ever. On June 11 SpaceX reportedly hopes to raise $US75 billion ($104.5b) from investors, by issuing shares that will begin trading on the Nasdaq exchange the next day. Elon Musk’s rocketry firm will probably soon be followed by two other mammoth listings.

Anthropic, an artificial-intelligence lab, filed draft paperwork for its initial public offering on June 1; OpenAI, a competitor, is expected to do so soon. The two are rumoured to be seeking as much as $US60b apiece. Together, the three giga-IPOs may add as much as $US4 trillion to the market value of listed American companies in a matter of months.

How on Earth will the stockmarket handle this? Headlines predict a “trading frenzy”. Steve Sosnik, chief strategist at Interactive Brokers, one of the world’s biggest online trading platforms, has warned of the “existential risk” the listings pose.

A particular worry is that compilers of stockmarket indices will grant the gigantic trio fast-track entry to their benchmarks. That would prompt tracker funds with trillions of dollars in assets to buy the newly minted shares days after they are issued. After exhausting a big pool of buyers straight away, who will be left?

The answer is: lots of investors in an extraordinarily deep and liquid market. Unprecedented as the serving of supersized IPOs is, America’s extraordinary stockmarket will gulp it down. In the years to follow, though, expect some indigestion.

First put the giga-IPOs’ size in context. In nominal terms, the current record for capital raised by a debut listing is held by Saudi Aramco, which in 2019 garnered $US29b ($US38b in today’s money) when it floated in Riyadh. SpaceX, Anthropic and OpenAI are collectively targeting $200 billion-odd. Yet this is a rounding error in America’s stockmarket. Firms in the broad Russell 3000 share index have a total market value of $US79 trillion; those in the narrower (but more widely tracked) S&P 500 index of big companies are worth $US69t.

America’s ten biggest listed AI-related firms already account for two-fifths of the S&P 500’s value

As a consequence, investors in index funds will not immediately see their portfolios change much. Although Nasdaq has already shortened the “seasoning” period before index inclusion to 15 trading days and FTSE Russell has slashed its waiting time to five days (and S&P Dow Jones is reportedly considering something similar), most share indices weight firms in proportion to the value only of shares they have released for public trading (the “free float”).

For SpaceX, this means just the $US75b or so of stock it intends to issue in June — so its initial weight in the S&P 500 will be around 0.1 per cent. The NASDAQ 100 is an exception, and has changed its rules to weight companies at up to three times their free float, in an apparent effort to woo Mr Musk. Even so, SpaceX’s probable initial weight in this $US40t index will still only be around 0.5 per cent.

This will change as more shares are released for trading. All but one of America’s listed tech giants have free floats above 85 per cent; the lowest is that of Meta, which went public in 2012 and has 13 per cent of its shares still owned by Mark Zuckerberg, its founder.

At first, “lock-up” provisions in the IPO prospectuses of SpaceX, Anthropic and OpenAI will prevent company insiders and early investors from selling their existing stakes and raising the free float. Over time, however, these will expire and trillions of dollars’ worth of new shares will come to market.

SpaceX plans to release its locked-up shares in a series of tranches. If its IPO issues $US75b of shares, valuing the firm at its hoped-for $US1.75t, the initial free float will be 4 per cent. None of Mr Musk’s stake, which accounts for about half of the remainder, can be sold for 366 days after the IPO. This restriction also applies to some shares held by “certain significant investors”.

Lock-ups on the rest, representing a little under half of SpaceX’s value, will expire more quickly. After its first quarterly report, probably in August or September, insiders can sell 20 per cent of their stakes. They can offload another 10 per cent if the shares are then trading 30 per cent or more above their IPO price. Extra tranches are due for release on set dates after the IPO, and after the second quarterly earnings report.

Insiders do not have to sell their shares, of course. Mr Musk, in particular, may hold on to his — most of which carry outsize voting rights and so cement his control of SpaceX. Similar considerations will apply to shareholders in Anthropic and OpenAI after the labs’ flotations. So the addition of these firms to public markets will unfold over years rather than days.

Gradual does not, however, mean inconsequential. If history is a guide, those who buy the resulting shares stand a good chance of disappointment. Jay Ritter of the University of Florida has studied the post-IPO returns of stocks listed between 1980 and 2024. The average such stock returned 20 percentage points less than the broader market over the three years after its first trading day. Firms valued at over 40 times their revenue underperformed by 58 percentage points. SpaceX, with a valuation of $1.75 trillion, would begin trading at over 90 times its revenue.

Blockbuster IPOs are also often taken as a sign that a bull market is nearing its peak—understandably, since firms want to sell shares for top dollar. The last surge in listings, in 2020 and 2021, came just before a bear market. Previous IPO booms, for instance in the late 1990s or the years before 2008, were followed by far bigger slumps.

Today, if the giga-trio underperforms, it may even precipitate a correction. All three firms are closely associated with progress in AI and so too, increasingly, is the wider market: America’s ten biggest listed AI-related firms already account for two-fifths of the S&P 500’s value. Bad news for SpaceX alone might not harm a tracker fund much; bad news for AI certainly would.

Funds that weight each of an index’s component stocks equally, rather than by market value, offer some protection from this. But they also amount to betting against the market — the opposite of passive investment.

A broader worry still is that the giga-IPOs herald more capital-raising, both by the newly listed tech giants and their older peers. For years, notes Victor Haghani of Elm Wealth, an investment firm, capital has been abundant and shares increasingly scarce.

Tech giants have generated so much cash that they have been buying back shares rather than issuing new ones even as white-collar workers have ploughed retirement savings into the market. This drove up share prices.

Now the tech behemoths are slowing share buy-backs or halting them altogether, instead reinvesting their profits to develop AI. Several have turned to the bond market for more capital. And the club’s newest members are tapping the stockmarket.

At the same time, white-collar workers are perhaps most in danger of seeing AI automate their jobs and immiserate their pension pots. Expect investors will go ga-ga for the giga-IPOs. A few years from now, though, the stockmarket may need to prepare for a capital diet.