Elon Musk and the fear of missing out
Why Wall Street wants to buy SpaceX stock even at a sky-high valuation
“Today I invited myself to help open gifts from the Pets.com gift center,” began a holiday season 1999 tv commercial featuring the company’s Sock Puppet character, voiced by Michael Ian Black.
The 30-second spot ends with the puppet looking at Christmas stockings hung around a mantel and saying mournfully, “How could they do this to socks? Oh no, the horror!”
That year the Sock Puppet appeared in the Macy’s Thanksgiving Day parade; a Super Bowl ad would soon follow. On February 11, 2000, the company sold shares to the public for $11, raising a total of $82.5 million.
It was one month before the Nasdaq hit its dot-com era peak and slowly began an excruciating crash. Pets.com wouldn’t even survive until the next Thanksgiving Day parade. When the company shut down on November 7, 2000, the shares were trading for 22 cents.
Investors who bought at the IPO asking price lost 98 percent of their money in 268 days. The Sock Puppet was sold off to an auto loan firm, reportedly for $125,000.
The Wall Street Journal quoted investment analyst Matt Stamski saying, “People were betting on ideas that were almost stillborn. It’s almost unprecedented to see an entire sector go from an idea to heavily funded to defunct in just a year and a half.”
In hindsight, of course, it’s easy to spot investment mania. Looking ahead, no one can safely predict when a stock market boom will end, or whether a particular company will succeed or fail.
SpaceX is about to go public in an era of high stock-market valuations, aiming to raise $75 billion in a sale that values the company at $1.77 trillion. Wall Street giants are falling over themselves to buy large chunks of the stock. The Wall Street Journal said BlackRock has submitted an order for at least $5 billion worth.
There’s no comparison between SpaceX and Pets.com. Elon Musk’s company launches partly reusable rockets into space and runs the very successful Starlink communications business, even though it doesn’t make a profit overall. Pets.com was wildly unprofitable.
But the Journal’s Spencer Jakab made a vital point about the astronomically high price of the impending public offering: “SpaceX will fetch a price/sales multiple of 92 times at the IPO price but doesn’t make a profit. For perspective, at the peak of the dot-com bubble, tech companies in the S&P 500 fetched an average multiple of seven times revenue.”
You may soon own some of SpaceX, if you hold ETFs or mutual funds that track the Nasdaq index. (The S&P 500 index has a one-year waiting period for inclusion and companies must be profitable.)
Later this year, two giant AI companies could go public: Anthropic and Open AI. It’s too early to tell whether their offerings will be as pricey as Musk’s.
FOMO
In May, 2004, Harvard Business School student Patrick McGinniss attempted to analyze the fraught behavior of his fellow students trying to manage their social lives at a time of many options. “First year, especially first semester can be a trying time socially,” he wrote in the student publication Harbus. “In this state of social flux, FOMO, or Fear Of Missing Out, weighs heavily on the psyche.”
Fear of Missing Out applies to a lot more than Harvard students having to decide whether to attend a sherry tasting. It explains much of what happens on Wall Street, where following the herd is a way of life for many.
Investment advisers risk losing their clients if they don’t recommended buying the top-performing stocks. On March 10, 2000, the day the Nasdaq hit a new high, New York Times business columnist Floyd Norris wrote:
As the number of shares that are rising has narrowed, pressure has grown on money managers to buy the stocks that are working and to shun the stocks that are not. That pressure has been intensified by mutual fund investors, who have pulled money out of many funds that have been poor performers while pouring cash into funds that have been rising.
‘’Right now, valuation measures are being thrown out the window,’‘ said Phillip Coburn, a strategist at Warburg Dillon Read. He said that the average price of technology stocks, using a measure that compares price-earnings multiples with earnings growth rates, is now twice what investors deemed reasonable only a couple of years ago.
Was this sustainable? Norris noted that Phillip Coburn thought it was: “Money managers are only being prudent when they load up on technology stocks. ‘Given the fact that I don’t see the end in sight, I don’t think they are being foolish,’‘ he said. ’They are being practical, and they are making money for their clients..’”
“The end” started to come over the next several months. By October, 2002, the Nasdaq index had fallen 77% — and it wouldn’t reach another record high until April, 2015.
The experienced analysts at Morningstar think SpaceX’s initial offering price, expected to be $135 a share, is way too high. They assess the value of the company at $63 a share, less than half of the price buyers will likely pay. They concede that if Musk’s moonshots — a fully reusable Starship and widespread development of orbiting data centers — materialize, the stock could be worth $154 a share. But they give that scenario only a 7 percent chance of happening.
Yet even if the moonshots are proven to be fantasies, SpaceX could still rocket higher than its $135 initial price. If enough people fear missing out on the riches they anticipate from Musk’s venture, they could bid the price of the stock far higher.
Still, if SpaceX shares do reach the stratosphere, enjoy it — and remember that the air is thin at that height, and the fall is a long way down.