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00:00 Speaker A
SpaceX is already thinking about inclusion in major stock indexes ahead of its potential IPO. It’s according to Wall Street Journal. Yahoo Finance Jared Blicry is here to take a closer look at how companies actually earn a spot in those major indexes in the latest edition of stocks and translation.
00:23 Jared Blikre
We’ve got three mega IPOs on deck this year, and now Elon Musk’s SpaceX story has a new twist. Its IPO advisors are reportedly looking into getting the space giant into the major indexes like the Nasdaq and S&P 500 a little sooner than usual, which would in turn virtually guarantee billions in stock purchases after the IPO. But it’s not a straight shot to get there, and that’s what we’re digging into in today’s Stocks and Translation. First, let’s walk through the rules because they really explain the entire game.
01:03 Jared Blikre
So here we have both the Nasdaq 100 and the S&P 500 rules, the two Index Kahunas, and they have two very different philosophies. The Naz 100 is more like a checklist. You list, you trade, you check the boxes, and if you’re big enough, you can get in relatively quickly. Right now, you just wait three full months. The S&P 500 is more like a country club membership with a credit check. It’s not just are you big, it’s are you profitable? And does the committee want you in the club? And there’s a one-year minimum wait.
01:39 Jared Blikre
And the buzz around it is loud right now because there’s also a new idea floating around Nasdaq land, and it’s a fast track that could shrink the post- IPO wait down, wait time down to three weeks. But on the S&P side, there’s no discussion of fast tracks just yet, and profitability, it’s a hard gate. So fortunately for SpaceX, it will likely pass the one-year profit test right out of the gate. But for the other two mega IPOs, Open AI and Anthropic, they’re almost certainly unprofitable, so they’re likely a long way off from joining America’s benchmark index.
02:22 Jared Blikre
Now, let’s put some history on this. Here are some examples of big IPOs and how long they had to wait to join the S&P 500. Take meta, then Facebook and Alphabet. They both got in fast, about a year and seven months. That’s the clean version of the story. Big, liquid, established businesses and the market got comfortable. Airbnb took longer, almost three years. Uber took longer still, over four years. Why is this? Because sometimes a company is huge, but the path to consistent profit, that’s what matters for the S&P.
03:00 Jared Blikre
Palantir is a good reminder that this isn’t only an IPO story. That was a direct listing, and it still took almost four years to land in the S&P 500. And then there’s Tesla, Elon’s first big public company, 10 years, 6 months. That one tells you that the S&P is not just about those day one IPO pops. It can be a really long game. Okay, so why do indexes build in a weight at all?
03:32 Jared Blikre
First, price discovery. An IPO is a hype machine and a pricing exercise, both at the same time. The index wants to see where the stock really lives when all the confetti clears. And second, a new listing has a thin float early on. A lot of shares are still locked up and can’t be sold. So a little buying or selling, that can whipsaw the price more than usual. And third, these lockups change the supply of shares, and this is where you can get a sneaky price drop when the lockup expires, even if the IPO looked great on day one.
04:15 Jared Blikre
And finally, index additions can distort, because when an index adds a stock, some funds have to buy it. Not because they love it, because their job is to match the index. And here’s a great reality check from the definitive IPO trading book called The Lifecycle Trade. Cathaleen Donnelly and the other authors found that 91% of IPOs eventually undercut their day one low, and 55% do it within three weeks. That’s a great reason why the index weight exists and why you don’t need to rush to buy these new listings.
05:00 Jared Blikre
Now, here’s what to keep your eye on as these mega IPO stories evolve. Watch for developments on the Nasdaq proposal to shorten the time to index conclusion inclusion, and anything similar from the S&P Index Committee, though it’s unlikely those guys will budge. And then when these giants finally start trading, pay attention to the lockup expirations. When the early buyers are free to sell their shares, it’s a potentially bearish event.
05:32 Jared Blikre
And also keep an eye on the financials and the prospectus and the earnings reports to keep track of when the AI giants might be eligible for the S&P. Remember, they need a year of continuous profits. And finally, watch for those announcements about getting added to the indexes because stocks will often get a nice bounce when the press release drops, but by the time they are actually added to the index, a lot of times that bump fades. And tune in to the Stocks and Translation podcast for more jargon busting deep dives. New episodes can be found Tuesdays and Thursdays on Yahoo Finance’s website or wherever you find your