Watching the SpaceX IPO
This is my potlatch for you of red flags and risk factors I am interested in regarding the SpaceX IPO.
Introduction
MarketWatch’s MW Brett Arends does a very good SpaceX “red flags” preview column. In it he mentions many of the obvious things like the fact that SpaceX loses a lot of money. He also mentions another funny strange, not funny ha ha, thing:
In case you missed it, jumbo Wall Street bank JPMorgan had a stock analyst covering Musk’s other publicly traded company, Tesla, who was resolutely bearish. By an absolutely amazing coincidence, JPMorgan a month ago suddenly reallocated that analyst. His replacement initiated coverage of Tesla with a target price more than three times as high. And Musk cut JPMorgan in on the IPO. JPMorgan declined to comment.
Nothing to see here, folks. Move along.
JPMorgan Chase closed the book on its yearslong legal pursuit of Tesla on Friday, abandoning a $162.2 million lawsuit it filed in 2021 alleging the carmaker reneged on a stock warrant deal after the bank lowered the strike price.
A one-page court filing noted that the legal dispute between the firms was “voluntarily dismissed with prejudice,” meaning neither firm can refile the claims. Settlement details were not disclosed.
“JPMorgan and Tesla have decided to enter into a new commercial relationship and settle the outstanding disputes between the companies,” a JPMorgan spokesperson told Banking Dive via email. “This is a good outcome for all and we look forward to working together.”
Yeah, that sorts and lines up with what FT Alphaville said:
“Getting a lot of banks involved in an IPO has a side benefit: it subdues the potential for criticism. Every firm brought into the tent by an issuer, beyond a vested interest in being nice, has to abide by the rules. In the US, these include a blackout period for publishing research of 40 days for lead underwriters and 25 days for everyone else.
With SpaceX using 23 banks for its capital raise, independent research about the record-breaking float has been very hard to come by. That alone is our reason to raise awareness of a couple of notes from the team at Morningstar.”
Reminds me of the time many years ago that one of the Big 4, one of the remaining firms I had not worked for yet, wanted to hire me for a top strategy role. I saw it for what it was: a ploy to get me to stop writing. Never looked back.
What do I look for in a prospectus?
During my tenure at MarketWatch, I drafted or contributed to a lot of “5 Things to Watch For” in the various IPOs that occurred. I was charged with coming up with the accounting/audit angles no one else would talk about.
So, there’s been a lot written about the SpaceX IPO but here are some questions I apply when making a quick read of a long prospectus:
Risk factors – Look for unusual issues of controls including weaknesses, related parties, trends on revenue, going concern.
Auditors’ opinion — anything but boiler plate? More than one auditor?
Losses? What is cash position?
• After Theranos and WeWork, always look to see if they discuss how badly they need the IPO fundraise to keep going.
Look for dual or complex share structure to assess control landscape.
Any cyber security breaches in past and ongoing risk?
• JPM says its #1 risk is cyber-risk
Any unusual investments or assets not characteristic for industry or business model?
Any unusual revenue recognition not consistent with others in industry or especially others audited by same firm with same business model?
See Uber vs. Lyft https://www.marketwatch.com/story/uber-received-more-scrutiny-from-the-sec-than-lyft-during-the-ipo-process-2019-07-11
Any open SEC or other regulatory investigation? This is a given for any Musk-controlled company.
Any previous legal or regulatory issues including significant pending litigation? It wouldn’t be a Musk company without it.
Any issues with implementation of financial reporting software – ERP or other application critical for business like inventory in a retail or consumer products company?
SpaceX admits in the risk factors to its prospectus it has no idea when it will ever be profitable.
We have a history of net losses and may not achieve profitability in the future.
We incurred net losses of $(4,937) million and $(4,628) million for the years ended December 31, 2025 and 2023, respectively, and a net loss of $(4,276) million for the three months ended March 31, 2026. We may not achieve or, if achieved, sustain profitability in the future. As of March 31, 2026, we had an accumulated deficit of $41,311 million. While we have experienced significant growth in revenue over the last three years, we cannot predict whether we will maintain this level of growth or when we will achieve profitability again.
Cash balances have been artificially propped up by massive borrowing.
Why does SpaceX need this IPO? Like always Elon Musk says a lot of things but the reality is often something very different. Via the Motorhead newsletter:
When Jamie Dimon, JPMorgan’s iconic CEO, asked Elon Musk at an investor meeting last week why SpaceX is going public now, Musk smiled and replied, “We’re embarking on a massive new growth phase, and we need capital for that.”
This isn’t exactly true. In fact, it’s as close to a lie as one can get without lying, given that the $75 billion of funds that will be raised by SpaceX’s IPO will go to pay down liabilities linked to Musk’s failed AI start-up, xAI:
xAI, was burning cash at a rate of over $1 billion per month last year, with minimal revenue. While segment cash flows aren’t disclosed, the EBITDA less capex in SpaceX’s AI division last year came to a $15.5 billion deficit.
Much has been written about how Musk controls it all. From the New York Times (gift link):
In January, SpaceX granted Elon Musk, its founder and chief executive, a pay package that eventually totaled 1.3 billion restricted shares. The award was contingent on the rocket company’s establishing a colony on Mars with one million inhabitants and launching high-powered data centers into space.
Mr. Musk has not achieved those goals. Even so, he can vote those 1.3 billion shares in shareholder decisions, according to SpaceX’s offering prospectus, which was released on Wednesday. In other words, the company is allowing Mr. Musk to vote with shares he has not yet earned.
“I have never heard of this,” said Ann Lipton, a law professor at the University of Colorado, Boulder. “He basically found a way to hack the normal rules of corporate organization.”
The restricted shares weren’t the only unusual corporate governance arrangement that SpaceX revealed as it prepares what could be the largest initial public offering ever. The company, which builds rockets and operates the Starlink satellite internet service, has valued itself at more than $1.25 trillion, and its I.P.O. — which is set to happen as soon as next month — is likely to create a bonanza for Wall Street, Silicon Valley and, of course, Mr. Musk.
Economist and former NYT columnist Paul Krugman is no fan:
Yesterday I took a short trip. I began with a ride on the local Hyperloop, which ran through a tunnel dug by Boring Company. Then I used my neural implant to summon a fully self-driving Tesla robotaxi. While enroute I read the latest news from the Mars colony.
OK, none of that actually happened, because those products don’t exist. There are no working Hyperloops. The Boring Company has not dug any commercial tunnels. Tesla has a few self-driving — though not fully self-driving — taxis in Austin and nowhere else. (Google’s Waymo driverless taxis are operational in several major hubs.) Neuralink, which is purportedly pioneering brain implants, has tested its products in a handful of patients but done no more than that. And of course there is no Mars colony: there have been no manned flights to Mars, nor the prospect of any for the foreseeable future.
Yet at various points over the past decade Elon Musk promised that each of these services would be available by 2025 if not sooner.
My friend and frequent collaborator Olga Usvyatsky and I wrote about the progression of SpaceX drafts registration statements and some of the comments the SEC may have made that drove the changes along the way, including with regard to alternative financial, performance, and operational metrics. We also wrote about the leaks that drove media commentary:
We heard our work was used in a class at Univ. of Texas Austin this week!
📜 We'll quickly cover some of the context before the IPO, including confidential S-1s, Amended S-1s, amendments to amendments, the comment letters not yet released (thanks to some excellent work by Francine McKenna and Olga Usvyatsky), discuss related issues, including shareholder rights and the role of Index Funds (building off work by Matt Levine) and cover an useful perspective from Peter Perri III (whose recent work exposed me to the *amendment* to the amended S-1) and bring in some commentary from our current MPA students.
In preparation for the first day of trading on June 12 — despite Senator Warren’s last minute efforts to appeal to SEC Chair Atkins to stop it — I wanted to pick off a few more items in the Prospectus that interest me.
After the paywall I’ll talk about the CFO, the material weaknesses, the auditors’ opinion, and the Audit Committee.