Investors who make money by betting against stocks may want to think twice before targeting Elon Musk’s SpaceX when it goes public.
At first glance, the aerospace company appears to be an attractive candidate for short sellers — those who borrow shares and sell them, hoping to buy them back later at lower prices for a profit.
The company carries an estimated price-to-revenue ratio of 56, which is remarkably high even for rapidly expanding businesses, and faces questions about corporate governance that could justify bearish bets. However, the ongoing market surge — driven by technology companies worth $1 trillion or more, a category SpaceX will join — has proven costly for investors wagering against stocks.
Consequently, market watchers don’t anticipate aggressive short selling when the highly anticipated public offering launches, with SpaceX expected to reach a $1.75 trillion valuation.
“It’s an extremely risky short play,” said Gabriel Shahin, CEO of Falcon Wealth Planning in Los Angeles, whose firm has allowed its investors to buy SpaceX shares on private markets. He said there is too much interest from bullish investors, including retail participants, for a safe short bet.
This doesn’t mean SpaceX lacks features that might appeal to short sellers. The company’s market value surpasses most other large corporations, and questions remain about the financial prospects of its xAI platform and technologies like orbital data centers, according to Morningstar analysts in a recent report.
CAUTIOUS APPROACH
Peter Hillerberg, co-founder of Ortex Technologies, which provides stock lending and short interest analytics, said the high profile of the IPO, retail and institutional interest, and divergent views on its valuation, are “normally ingredients that can create a broad spread of opinion, which is often where short sellers become interested.”
He noted it is too early to gauge actual demand.
One veteran Tesla skeptic plans to observe before acting. “There are large natural buyers in the indexes that will almost immediately add the stock, most notably the Nasdaq 100,” said Mark Spiegel of Stanphyl Capital Partners, who considers SpaceX “grotesquely overvalued.”
The public offering is anticipated to become the biggest on record at $75 billion, though less than 5% of total outstanding shares will be available for public trading.
Spiegel indicated he might consider shorting SpaceX after the “unlock dates,” when additional shares become available for borrowing, rather than immediately following the IPO, when borrowing costs and difficulty would discourage short positions. “Very few people will short an IPO right away.”
Although most newly traded companies impose broad limitations on insider sales for approximately six months after going public, SpaceX has established exceptions for certain participants and plans a gradual release of restricted shares.
THE MUSK ELEMENT
Betting against Musk’s other enterprise, Tesla, has typically resulted in losses. Theoretically, Tesla short sellers have lost $27 billion since June 2021, including both direct bets against Tesla stock and index hedges used to account for Tesla’s inclusion in the S&P 500, according to S3 Partners. Over the past decade, shares have climbed more than 2,500%.
“If you think back the experience of all of that was pretty unpleasant,” said Sam Pierson, director of research at S3 Partners.
Musk has conducted a very public campaign against short sellers, including notable investors like Jim Chanos, David Einhorn, and “Big Short” investor Michael Burry. He has mocked his critics by selling red satin shorts and even sent a box of shorts to Einhorn.
In August 2018, Musk posted his infamous “funding secured” tweet, announcing he was considering taking Tesla private at $420 per share, prompting a surge in Tesla’s share price and dealing about $1.3 billion in mark-to-market losses to shorts.
Musk, Chanos, Einhorn, and Burry did not respond to requests for comment.
DIFFICULT ENVIRONMENT
More generally, short sellers have faced significant challenges over the past ten years due to the extended bull market, with difficulties increasing during the meme stock phenomenon in 2021.
The Goldman Sachs Most Shorted Rolling Index, an equal-weighted collection of the 50 highest short-interest names in the Russell 3000 Index, has gained 29% this year, heading toward its fourth consecutive year of increases.
The activist short seller approach suffered a recent setback with the fraud conviction of prominent investor Andrew Left, a development that could discourage the practice.
Even investors doubtful of market excitement may choose to avoid the difficulties of shorting a new stock like SpaceX.
“As a short seller you want to make a case that the stock has reached a level that’s untenable and that’s much easier to do with trading history,” said Giuseppe Sette, co-founder of AI analytics platform Reflexivity.
With stocks trading near record levels, short sellers have numerous options to consider.
“If SpaceX pops 100% on its IPO, is that still the best short out there in a market where you’ve had absolute parabolic activity across the board?” said Mike Treacy, head of market risk at Apex Fintech Solutions, a clearing and custody platform serving retail brokerages.
“I just don’t think it is.”
