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When Space Exploration Technologies (NASDAQ: SPCX) conducted its initial public offering this summer, it bucked several long-standing trends. One of those trends was to go public by selling at least 10% of shares to the public. Many big tech companies, for example, initially offered 15% to 20% of their shares to the public during their IPOs. SpaceX, however, went public with just 5% of its total outstanding shares available for trade.
There's nothing inherently wrong about offering up only a tiny fraction of a company's outstanding shares for public purchase. But it does create challenges.
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The S&P 500 index, for example, typically requires a public float of at least 10%. SpaceX's application to fast-track its inclusion into the index was denied. Low public float can also create additional volatility, as surges in buy or sell volumes can more easily overwhelm available supply. While several other factors were at play, the low public float likely contributed to SpaceX's early stock price volatility.
There is precedent for such a low initial public float. Saudi Aramco raised $25.6 billion with an initial public float of just 1.5%. SpaceX, however, raised a much larger $85.7 billion without upping its public float above 5%.
Very quickly after its IPO, however, SpaceX's public float began to rise. An additional 20% of shares became available when second-quarter earnings were released in August. October's third-quarter results freed up another 28%, with several other unlocking events throughout the adjacent months. In December, another 17% will become available for trade. That essentially frees up all of SpaceX's locked shares, minus the massive chunk of shares CEO Elon Musk will see unlocked next summer -- shares that are unlikely to be sold, and therefore often not included in many lockup percentages.
What will happen in December when an additional 17% of SpaceX's float becomes publicly traded? History has a clear answer.
When SpaceX went public, many analysts were worried that ongoing share unlocks could create selling pressure for the space stock.
In October, SpaceX experienced the largest share unlock of any company in history, freeing up more than $180 billion worth of stock. As analysts predicted, volatility ensued. Early in the month, shares zoomed from $150 to $170, only to shed those gains by the time earnings were announced on Oct. 21. When 1.3 billion shares were unlocked on Oct. 22, heavy supply pressure resulted in a 9% single-day drop. By the end of October, SpaceX's stock price was below its initial IPO price.
The largest unlock period for SpaceX before that was in early August. Roughly $100 billion in shares became available for trading. Shares initially dropped below $110 as the unlock date approached. Afterward, however, shares rallied, ending the month with a 32% gain.
In general, there's no guarantee what will happen before, during, or after a major share unlock. If there were a strong trend, markets -- which are forward-looking -- would quickly price that upward or downward potential into the stock's current valuation. That's especially true given that the market knows exactly when unlock dates will be triggered. Some research suggests that a 1% to 3% drop during an unlocking event is to be expected on average, but that's an incredibly rough estimate for a single security.
In short, investors are likely wise not to trade around SpaceX's lockup period, even if it is one of the largest share unlocks in history. The better move is likely to assess the projected fair value of SpaceX as a business and accumulate shares if selling pressure arises and pushes the company's stock price below your fair value estimate.
Share unlock schedules get a lot of media attention. But in the long term, they mean very little. Even though SpaceX's unlock schedule is historic, expect these events to have minimal impact on the company's long-term success.
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Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Space Exploration Technologies. The Motley Fool has a disclosure policy.
SpaceX's December Lockup Is Nearly the Biggest Share Unlock in IPO History. History Says This Is What Happens Next. was originally published by The Motley Fool
