I Helped Pick Stocks for the Dow. I’m Watching the SpaceX IPO Carefully

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Please join The Information at the New York Stock Exchange on Monday, April 27, for our “Financing the AI Revolution” forum. Hear from top executives and investors on how the rapid build-out of AI is reshaping tech, finance and capital markets. Learn more here.SpaceX’s financial challenges have become clearer in the past week, thanks to new reporting from my colleague Cory Weinberg. Last week, he broke news on SpaceX’s nearly $5 billion loss last year, and on Monday, he scooped details on the growth of Starlink and the losses in the company's space and AI businesses.Armed with that information, it becomes clear how hard it will be for Elon Musk to raise the cash he wants at anywhere near SpaceX’s most recent $1.25 trillion valuation. It explains why he’s pushing so hard to juice demand by getting the stock quickly added to the major stock indexes.Whether the stock soon joins the S&P 500 and other big indexes is critically important, because inclusion in indexes creates tens of billions of dollars in demand from index investors who will be forced to buy SpaceX shares, no matter how they feel about its business or valuation.I am watching with an extra degree of curiosity to see how the indexes handle this, because a few years back I helped pick the stocks that made up the Dow Jones Industrial Average. It was the strangest part of my job running the finance coverage at The Wall Street Journal.At the time, the Journal’s editor-in-chief was responsible for picking the 30 stocks in the Dow. In practice, one of the paper’s top finance editors did all of the work. That was me. (The Journal’s editor no longer picks the stocks.)The goal was to have a mix of companies that reflected the U.S. economy, which had shifted away from the industrial sector and toward finance, tech and healthcare. Tech was easy: We added Microsoft and Intel in 1999. And the big pharma companies were obvious. We also added financial companies like banks and insurers. Those industries had been growing fast, thanks to a boom period with relatively low interest rates and a soaring housing market. That meant a ton of mortgages, which helped spur a flood of financial innovations, including the collateralized debt obligations and credit default swaps that turned toxic in the downturn.In early 2008, we added Bank of America. Months later, the bottom fell out of the financial system. Over the next year and a half, we pulled Citigroup and AIG (and General Motors) out of the index after Washington bailed them all out. How does this relate to SpaceX? Because it’s a reminder of how things can go wrong on what you think are certain bets. Back in the years immediately preceding 2008, few believed the housing boom would end. But it did, leading to a nationwide decline in home prices that had never happened before. Investors who thought mortgages were safe and lucrative investments lost big. Among those investors were the banks and insurers we had put into the Dow.Fast-forward to the present. While tech has struggled this year, few people can imagine a yearslong sell-off that wipes out trillions in investments. But valuations are relatively high, debt levels have risen and the sector has lashed itself to the booming yet unproven market for AI. Musk has also tied SpaceX to the AI boom with his promise to put data centers into space, as my colleague Theo Wayt has reported. That is presumably Musk’s justification for the valuation of SpaceX’s successful but slow-growing rocket company, its lagging, cash-burning AI company and its solidly performing satellite internet service. If the initial public offerings of SpaceX, and later Anthropic and OpenAI, come in below investors’ lofty expectations, the damage could be widespread. The tech sector accounts for about a third of the U.S. stock market’s value, as well as a large portion of its gains over the past three years. SpaceX won’t join the Dow anytime soon. That doesn’t matter much because very little money tracks that benchmark. The index that matters is the S&P 500—roughly $20 trillion in both index funds and investments are benchmarked against it. S&P has pretty strict requirements about letting companies in. SpaceX will pass most of them but could get tripped up by requirements that companies be profitable and rules about their float, meaning the portion of a company’s shares that trade on the market. If SpaceX does get into the index ata $1.25 trillion valuation, the stock would land in the top 10 of the market at current prices, right behind Tesla and making up roughly 2% of the index. That would spur some $400 billion of buying. Knowing those forced buyers were waiting in the wings, investors could invest with confidence their shares would go up.Such perceived safety in what are actually risky assets has often been the cause of financial crises. Here’s where problems could crop up. My colleague Cory’s reporting shows that SpaceX lost $5 billion last year and that $11.4 billion of its $18.7 billion in revenue came from its satellite internet company, Starlink. The space and AI businesses burned $17 billion in cash, while Starlink generated about $3 billion. Yet SpaceX is valued at 266 times last year’s earnings before interest, taxes, depreciation and amortization. Every company above it in size is valued at a fraction of that amount except for Tesla, which comes in at 119 times.If Musk’s dreams of robotaxis, robots and data centers in space don’t come true, millions of investors could be stuck holding two expensive stocks without much to justify their prices. It won’t be another financial crisis, but it will cause real losses in the markets. New From Our ReportersExclusiveOpenAI Plans New Pricing for ChatGPT Ads, Explores Other UpgradesBy Ann GehanExclusivePolymarket Reverses Course on Startups That Piggyback on Insider TradesBy Michael RoddanAI InfrastructureMicrosoft Slowed AI Spending. Now It’s Playing CatchupBy Ann Davis Vaughan

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