SpaceX shares could “double or halve in the next few days”, Scottish Mortgage manager Tom Slater has warned, noting that shareholders in his investment trust need to be prepared to weather volatility as its largest holding launches on the New York Stock Exchange on Friday 12 June.
Scottish Mortgage is one of the stock’s more prominent backers with an estimated $3.5bn worth of shares, based on the initial public offering (IPO) price.
It is taking a large bet, with the (currently) privately owned space exploration company accounting for some 21% of the trust. Scottish Mortgage started investing in the company in 2018 but has not added to its position since 2021, the manager said.
Its rise through the portfolio to become the current number one position is largely through performance, as well as tangentially through Scottish Mortgage’s £1bn share buyback programme, which shrinks the share count and enlarges the weighting of remaining holdings – particularly private assets which are harder to sell.
Slater warned that, as a result, the trust has “a lot in one name” and therefore has a “very high degree of concentration”.
“Be aware that the fund is not as diversified as it has historically been,” he said, adding that current and would-be investors need to take a view on the value of SpaceX before making any decision on investing in Scottish Mortgage.
“As you consider Scottish Mortgage as a stock today, you have to be mindful of that concentration risk – and of course, of where you start,” he added, alluding to missing out on the exceptional gains already made.
SpaceX shares are due to start trading at $135, giving the company a $1.78trn valuation, making it the largest IPO in history.
As is common with these types of events, investors who backed SpaceX whilst private will endure a lock-up period. This is typically a 180-day restriction, but SpaceX is instead using a staggered arrangement, allowing sales at set points across the first 180 days, including after its second-quarter results, which Slater said are to take place in mid-August.
At this point, pre-existing shareholders can sell up to 20% of their locked-up shares – or 30% if the stock is at least 30% above the IPO price. There will then be a second opportunity to sell following the firm’s third-quarter results around October/November, when a further 28% can be sold, as well as five smaller sales at different dates.
“What that tells you is that whatever happens to the SpaceX stock, for at least the first two months, we will be sitting with that 21% position,” he said.
“If the stock is volatile, that will feed through into volatility in the fund. The message for investors (or potential investors) is: We could be volatile through this period.”
He told Trustnet that investing around an IPO does bring more volatility, stating: “I still carry the scars of investing in Meta at IPO.”
The parent company of Facebook, Instagram and WhatsApp launched in 2012 but struggled almost immediately. The IPO got off to a poor start when it was delayed due to technical issues.
Upon launching, the stock shot higher initially but could not sustain the rally. Shares dropped shortly thereafter and less than two months later were down 50%.
If this happens with SpaceX, the lock-up period could see the Scottish Mortgage trust’s stake severely dampened. It could also rocket, pushing the 21% position even higher and deepening the concentration further.
But investors should not necessarily expect the trust to sell out of SpaceX when it is able to. Slater is bullish on the company’s long-term prospects, highlighting several reasons for this.
Firstly, he said the company is “at least 10 years and 600 [satellite] launches ahead of everybody else”.
“Blue Origin is the only other company to have landed and reused a booster, and it’s just had another delay. SpaceX has 85% of market share in orbit today, and that share is likely only going up from here,” he said. “So I see this really strong competitive advantage and I see the prospect of it lasting for a really long time.”
The issue for investors is how much it will cost SpaceX to gain access to space via its satellites and rocket launches. Slater said the company has the “low-earth orbit economy” to itself “for the foreseeable future”, but the cheaper it can be accessed the more use cases there are for it.
“That's the opportunity. That's what you're paying for. And the question becomes: how much are you prepared to pay for that today?”
However, even for Scottish Mortgage, which is a growth investor, there are still valuations that will prompt Slater to sell.
“For us it's not a blank cheque,” he said, using the example of Elon Musk’s other company: Tesla. The electric car maker was once the trust’s largest holding and was “close to the size in the fund that SpaceX is today”.
The manager sold significantly in 2021 and again after the recent US presidential elections “because we felt we'd got to the point where we were paying too much for those future options”.
“So it's not at any price. But I think the question investors have to ask themselves is: What are the potential payoffs, how big is the opportunity and how likely do you think it is that it can achieve that? Those are the variables that really matter today.”