Munro Partners and Plato Investment Management are among the few Australian growth funds to invest in Elon Musk’s SpaceX IPO while most of their rivals are sitting back until the world’s hottest stock becomes cheaper.
Nick Griffin, chief investment officer of the $9.1 billion money manager Munro Partners, said he was making a small investment in the rocket company, which is set to hit the boards in New York on Friday (Saturday AEST).
While Griffin acknowledged that SpaceX’s $US1.8 trillion ($2.57 trillion) valuation was expensive, he wanted to ensure that Munro had some exposure should the stock continue to surge well beyond its market debut.
“We love the company and, like any Elon company, it is unique and has amazing long-term opportunities, but the price is a little hard to stomach, so hopefully we get a better opportunity,” said Griffin.
The investment chief thinks that opportunity could present itself in a matter of months when insider lock-ups expire and private investors start to cash in.
Musk himself has agreed not to sell any of his roughly 40 per cent stake for at least a year after the IPO.
“If you look at the big IPOs such as Google, Facebook, Uber and even Spotify, there’s so much money that had to come out, so many private investors in SpaceX will have to sell in the next 12 months or two years,” Griffin said. “That private-to-public hand-off usually provides opportunities.”
Plato Investment Management is adopting a similar strategy and is buying shares via the IPO to build a position that will be roughly in line with SpaceX’s weighting on the index.
“[It is] enough to avoid being badly wrong if these businesses do become the next Amazon or Nvidia, but not so much that we’re hostage to a valuation that leaves no room for error,” said David Allen, who runs Plato’s $4.2 billion Global Alpha Fund.
Allen warned that SpaceX was trading on a price to revenue of 100 times, which implied that everything needed to go right for the company, including the technology, competition, regulation and execution.
“When you pay 100 times revenue for a business, you’re not buying a company, you’re buying a specific version of the future,” said the hedge fund manager.
“In our experience, the future has a habit of surprising even the most careful forecasters.”
While Allen has said that SpaceX was likely to make an attractive short in the future – that is when an investor makes money from a stock’s decline – he warned that building a short position now was fraught with risk.
“With a wave of retail money chasing what will likely be a limited free float at IPO, there’s little upside in betting heavily against these on day one,” he said.
While Plato and Munro are dabbling in SpaceX, some fund managers are holding back for now, while others, including Antipodes, are avoiding the company altogether.
A ‘trust me’ story
Alex Pollak, who runs Loftus Peak’s $1.5 billion Global Disruption strategy, said while SpaceX would likely rally in the first few sessions of trading at least, he was still happy to watch from the sidelines.
Pollak pointed to S&P’s decision not to change the rules for a company to join its major indices. That policy contrasted with rivals Nasdaq and FTSE Russell, which recently tweaked their requirements.
To join the S&P 500 Index, a company must trade publicly for at least a year, be profitable under US accounting standards and hold a free float of at least 10 per cent. SpaceX meets none of those requirements.
The rocket company posted a net loss of $US4.9 billion last year, while revenue rose 33 per cent to $18.6 billion. It has never been profitable.
“The float is clearly oversubscribed and the stock will probably go up, but we’re not investors,” said Pollak.
“To win a place in our portfolio, you need to have the possibility of stock price performance, and risks have to be controlled, but that is not the case with SpaceX because it’s just a ‘trust me’ story.”
Ziller Funds Management has also opted out despite SpaceX ticking many of the boxes required to be eligible for a position in its Ziller Global Fund, including the company being led by its billionaire founder.
Investment chief Joseph Ziller said he was bullish on the space theme, but not on the hefty valuation.
“Reliable launch is in extremely short supply because it’s incredibly difficult to do,” said Ziller.
“The only two players doing it are SpaceX and Rocket Lab, so the supply-constrained nature of the industry means the unit economics are very attractive.”
Ziller held a stake in Rocket Lab but has recently trimmed its position, given the stock has almost quadrupled in value over the past year.
“SpaceX is a similar situation – we’re not so interested at these valuations,” Ziller said. “There will be an opportunity over the next six months to 12 months to get in at a more attractive price.”
Hedge fund manager Jack Hu, who runs the Phoenix Growth Fund, built up a position in SpaceX earlier in the year after taking part in a funding round.
While that stake will be subject to a mandatory lock-up period, Hu has applied for another allocation through the IPO.
If successful, Hu said he planned to sell those shares in the first few days of trading as passive and benchmark-aware investors send the stock soaring.
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