Tesla Had to Wait a Decade. SpaceX Will Too.
Welcome to issue #28 of The Davem Dish. Every week I share what actually works in investing based on my 20 years of wins, losses and expensive lessons. You’ll also get my thoughts on solopreneurship and life in general because the same principles apply — keep it simple, stay consistent and focus on what matters.
Last week I wrote about why you don’t need to buy SpaceX, OpenAI, or Anthropic at IPO. The structural design of the IPO favors the people selling to you, and the data on the first 24 months of public trading is brutal.
A different fear has been making the rounds since. What if SpaceX gets added to the S&P 500 right after going public, then craters? Will my index fund returns get dragged down with it?
The answer is no. If you own an S&P 500 index fund, the waiting I argued for last week is already being done on your behalf. You just didn’t know it.
The Rules
To be added to the S&P 500, a company has to clear a list of hurdles that read like a patience checklist. Twelve months of public trading. Positive earnings the most recent quarter, with the trailing four quarters profitable in sum. At least 10% of shares actually trading on the open market. A minimum company market cap around $22 billion. A liquidity test, a domicile rule, and after all of that, an active vote from the committee.
In other words, the S&P 500 committee does exactly what last week’s piece argued retail investors should do. It waits for the lockup to expire. It waits for quarterly reports. It waits for a public-market valuation to settle. Then it considers a position.
The discipline you may not enforce on yourself is built into the index.
Let’s look at another Elon company. Tesla IPO’d in June 2010. By 2017, the company had grown to the average market cap of an S&P 500 component, big enough to qualify on size alone. The index didn’t take it and wouldn’t for three more years.
The reason was the profitability rule. Tesla lost money for nine consecutive years as a public company. Every time it looked like Tesla might post a positive quarter and finally clear the bar, the next quarter would slip back into the red. Year after year, the company sat outside the S&P 500 despite being one of the most valuable in the market.
Tesla finally posted its fourth consecutive profitable quarter in July 2020, ten years after the IPO. It was officially added to the index in December 2020 with five straight profitable quarters behind it.
The rule wasn’t bent for Tesla. It actively kept Tesla out for a decade, at a top 10 market cap, while retail investors who bought at the IPO watched the stock trade sideways and then collapse during the 2018-2019 stretch before finally taking off in 2020.
And just last Thursday, S&P Dow Jones formally rejected proposals to waive those same rules for megacap IPOs like SpaceX, OpenAI, and Anthropic. The framework that held Tesla off for ten years still holds.
Even If SpaceX Did Qualify
Suppose the rules do end up getting relaxed and SpaceX was included in the S&P 500 at the IPO.
What you’d own through your index fund is roughly 0.14% in SpaceX. That’s the initial weighting under the float-adjusted methodology the S&P 500 uses, where only the shares actually available to public investors count toward your weight. Headline valuations of $1.75 trillion don’t translate to index weight. The float does.
For context, NVIDIA already sits at 7% of your fund. Apple at 6%. Microsoft at 5%. The top ten holdings combined are close to 40% of the index. That’s the concentration that’s been driving your returns for years, in both directions. SpaceX would be noise in that picture.
Forget day one. What happens if SpaceX gets added to the S&P 500 in year three or year five at a meaningful weight?
That’s actually the version you want. By the time SpaceX or any newly public company earns its way into the index, it has had to clear the profitability bar. It has delivered four straight profitable quarters. It has survived the 12-month minimum. By the time the committee adds it, the company has done the work to prove the IPO valuation wasn’t fiction.
Your index fund won’t get SpaceX at the hype valuation. It will get SpaceX at the “real” valuation, several years after the people who bought day one have had time to learn whether their thesis was right.
Bottom Line
Last week I argued that the structural design of an IPO favors the seller. This is the other half of the same argument. The structural design of the S&P 500 favors the buyer, because the rules force the waiting that most individual investors won’t.
If you own an S&P 500 index fund, you’re holding a portfolio that someone else has already set up to do the waiting. The committee is not going to chase IPO hype. They’re going to wait for the data. Then they might add the name, and only at a weight proportional to the float that actually exists, by which point the company has already proved itself.
Hype builds an IPO. Rules build an index and only one of those consistently compounds over the long term.
Cheers,
Andrew
Are you trusting the index to do the waiting, or are you planning to make active bets around the IPO wave anyway? Leave a comment and let me know.
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The content provided are personal opinions and presented for educational purposes only, as of the date published or indicated. Davem Advisors LLC is not a bank, licensed securities dealer, broker or investment advisor. Displayed returns are unaudited. Nothing stated constitutes a recommendation or advice as to whether any investment is suitable for a particular investor. You alone are solely responsible for determining whether any investment, strategy or service is appropriate for your objectives. Past performance is no guarantee of future results. Inherent in any investment is the risk of loss.