Elon Musk’s SpaceX Had A Blockbuster IPO, But Its Biggest Test Is Yet To Come

Elon Musk's SpaceX made history with its initial public offering (IPO). It became the largest public issue ever. The rocket maker's stock surged higher on the first day of public trading, closing more than 19% higher from its IPO price.

But the share's real test still remains.

SpaceX could see an increase in the supply of shares once its lock-up period expires and many buyers cash out their investments.

Chan Ahn, the founder and CEO of private equity firm Tessera, told Business Insider that SpaceX's lock-up schedule is "the driver of the performance over the next six months," particularly for investors who got shares on the IPO day.

Why Is The Lock-Up Period Important For SpaceX?

Despite its blockbuster IPO, the majority of SpaceX's shares are not trading publicly. The free float, or portion of shares available for trading, is roughly  4.3%, with the remaining stock in the hands of employees, early investors and other insiders.  

Many in this group will get new liquidation options in the next few months.

While IPOs usually have a 180-day lock-up period, SpaceX has opted for staggered release dates at timelines and milestones determined in advance.

SpaceX has announced five release dates, each unlocking almost 7% of insider shares. They are set for release 70, 90, 105, 120, and 135 days after the IPO date.

The rocket maker's first two earnings calls post its public issue also unlock share releases. An additional 10% will be unlocked for trading if the stock increases 30% from its IPO price before its first earnings call.

The lock-up for the remaining insider shares, excluding Musk's stake. will end 180 days after the IPO.

Anh told Business Insider that the schedule frees up roughly 58% of SpaceX's stock, resulting in a “roughly 13-fold expansion of the float in six months”. A major portion of the shares will be unlocked between September and November, increasing price volatility.

While insiders selling their stock is usually seen as a bearish sign for a firm, due to structural reasons, early SpaceX investors may cash in when they can, which could lead to more selling.

However, history shows that present optimism over SpaceX's shares may be mistaken, Investing.com reported. Academic research on low-float IPOs reveals that since 1980, all but one large US public issue that floated less than 5% of its stock at the start, underperformed over the subsequent three years.

Companies with genuine operational competitive advantages can still perform strongly despite early volatility and a constrained-float debut. But for SpaceX, how its underlying business performs will ultimately set the trajectory it follows.