By Mark Hulbert

History suggests SpaceX will struggle to reward investors buying the stock at an astronomical valuation

SpaceX stock is likely to disappoint shareholders who buy right after the IPO.

SpaceX is betting that investors are exuberant enough to pay almost anything for a piece of the company.

SpaceX's sky-high market valuation makes it extremely unlikely its stock will be able to even keep up with the S&P 500.

Here's why: Consider the company's price-to-sales ratio (PSR) at its offering price. This ratio is highly useful when valuing IPOs. Other valuation ratios aren't particularly insightful since many IPOs come to market before booking any earnings.

At the $135-per-share price that SpaceX (SPCX) is targeting for its IPO, its PSR will be more than 90-to-1 - one of the highest in U.S. market history. Even IPOs that came to market with PSRs half as high have proceeded to underperform the market over the three years after going public.

This is illustrated in the chart above, which plots data from Jay Ritter, a University of Florida finance professor who has compiled the premier academic database of U.S. IPOs. There is a strong inverse correlation between an IPO's PSR and its subsequent three-year return. Those whose PSRs were above 40 when coming to market lagged the market by 58.5% over the three years after coming to market. (A full description of Ritter's calculations are available here.)

To put SpaceX's PSR in context, consider that the S&P 500's SPX comparable ratio is 3.7. Of course, fast-growing stocks typically trade at higher PSRs, so the S&P 500 may not be the most appropriate comparison. But even the growth-oriented Nasdaq 100 index NDX has a current PSR of just 6.1, and none of that index's constituent stocks has a PSR as high as what SpaceX's will be at its expected initial offering price. Nvidia's (NVDA) current PSR, for example, is 20.7.

A good story - but maybe not a good stock

All Wall Street needs to sell SpaceX stock to a hungry public is a semi-plausible narrative.

Given these numbers, it's safe to say that SpaceX's IPO is not being sold as a valuation play. SpaceX isn't unique in this regard, since few companies come to market as valuation plays. But that's exactly why they proceed to underperform the market, on average, over the three years subsequent to their offering-day closing prices. (The IPOs in the database summarized in the above chart, for example, lagged the market by an average of 3.2% over the three years post-IPO, according to Ritter.)

Instead of coming to market as valuation plays, companies instead take advantage of a favorable market environment. Their managements are attuned to investor sentiment, which is why IPOs tend to come in waves, peaking when investors are most bullish. SpaceX is betting that investors are exuberant enough to pay almost anything for a piece of the company. Current indications are that the company is right.

All Wall Street needs to sell SpaceX stock to a hungry public is a semi-plausible narrative. The company has attempted to provide that in claiming that its total addressable market (TAM) is a staggering $28.5 trillion. It is interesting to note that the company claims that only 1% of its TAM will come from "space solutions." Instead, virtually all of it ($26.5 trillion of the $28.5 trillion) will supposedly come from AI.

Might the company be right? Anything's possible. But the more important point is that there's no way of knowing how big the AI market will be. SpaceX's estimate could easily be off by many orders of magnitude. Given that its TAM estimate is so speculative, why didn't it claim its TAM is $40 trillion or $100 trillion? The ".5" in the company's estimate of its TAM is false precision. It reminds me of the joke that you know an economist has a sense of humor if he uses decimal points.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

Read: SpaceX officially set to crush global records in targeting massive IPO haul of up to $86 billion

More: SpaceX, Anthropic and other mega-IPOs could leave your index fund completely out of luck

-Mark Hulbert

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06-04-26 1517ET