Space Exploration Technologies Corp., more frequently called SpaceX, filed an S-1 form for its proposed initial public offering, or IPO.
The mission statement: “To build the systems and technologies necessary to make life multiplanetary, to understand the true nature of the universe, and to extend the light of consciousness to the stars.”
All that may be in someone’s mind, but eventually, business comes down to money. Regular folks — the retail investors — are often the target of the initial sales of shares once the IPO is off and running. Insiders who get shares at set prices hope for hype to generate demand that will push up the share price so they can unload a portion and make a good profit.
According to a 2021 analysis by Nasdaq, since the 1980s, IPOs by unprofitable companies have risen from 20% to 80% of the annual count. “Three years after their IPO, we calculate that almost two-thirds of IPOs are underperforming the market, with most (64%) more than 10% behind the market’s returns.” Some companies do well over time; some unprofitable companies become profitable. It’s difficult to accurately price new IPOs and know how much the investment might be worth.
Understanding a potential investment is critical. The people pushing the IPOs will provide the legal warnings, but there is so much more they may not have to say.
I can’t provide a thorough review. What I can offer are some suggestions of things to look at. A critical one is paying attention to the terms a company does. Companies increasingly use terminology that isn’t recognized under the U.S. GAAP accounting standards.
Non-GAAP terms can be useful. Industries may need types of metrics that aren’t officially recognized, although useful. But many companies use these terms to create images to look better.
For example, there is a GAAP term you may have heard: EBITDA, or earnings before interest, taxes, depreciation, and amortization. It’s a measure of operating profitability and a way to compare the performance of different companies. Then there is a non-GAAP term that many companies call adjusted EBITDA. They take the standard measure EBITDA and then change it, so it sounds better, even though financial filings of public companies have to show the GAAP terms.
SpaceX is one of the many companies that make use of adjusted EBITDA. In their case, they take net income or loss and exclude “(i) depreciation and amortization, (ii) share-based compensation, (iii) impairment, (iv) restructuring charges, (v) interest expense, (vi) interest income, (vii) other income (expense), net and (viii) provision for income taxes.”
Given the structure of Elon Musk’s other companies, particularly Tesla (and let us remember, he was an investor at first and then became the CEO, not a founder), he has typically taken large amounts of stock in compensation. SpaceX is no exception. Either directly or indirectly through trusts, he gets 5,569,053,075 shares of Class B stock and 849,731,970 shares of Class A.
These amounts, and those given to other executives, get ignored in a major business metric. Depreciation and amortization reduce the values of many corporate assets to consider eventual replacement costs. Exclude those, and you have a balance sheet that doesn’t accurately represent the value of the company.
To give you a view of how much change this can make, look below at the table from the S-1 filing that shows how much GAAP figures are changed.
That is an enormous shift in the apparent venture, with work and research parsing away everything for a better understanding of the truth.
Or consider the statement from the S-1: “Mr. Musk will be able to control the outcome of matters requiring shareholder approval. This includes the election of (i) a majority of our board, through his ownership of Class B shares (as Class B Directors), for so long as he holds a majority of the voting power of the Class B common stock, and (ii) the remainder of our board, for so long as he holds a majority of the combined voting power of the Class A and Class B common stock.”
Musk will have the only say, essentially, on every important issue of corporate governance. It’s perhaps useful to remember that he has made some major errors in the past, like securities fraud charges from the Securities and Exchange Commission over alleged false and misleading statements and omissions of material facts that caused Tesla’s stock price to rise. This resulted in his stepping down as chairman and being ineligible for re-election to the position for three years.
I’m not saying this is a potentially bad or good investment. Only to take your time and look carefully before handing your money over. As you should with any investment.
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