Elon Musk’s SpaceX IPO Is Funded by Other People’s Pensions

Elon Musk’s entrepreneurial career has always been a blend of unfulfilled promises and astonishing achievements. People are literally willing to take his fantasies and dreams at face value. Toyota sells six times as many cars as Tesla, yet Tesla is worth three times as much on the stock market as its Japanese rival.

With the IPO of SpaceX, however, the world’s first trillionaire has finally lost touch with reality. By 2055, a million people are to settle on Mars; vast data centres are to be built in space. That is pure science fiction. A market capitalisation of nearly $2 trillion is a bet on the future without any basis in reality. To justify such a price on conventional metrics, SpaceX would have to lift its AI revenue from $3.2 billion to $322 billion by 2030, multiply its total revenue 180-fold by 2040, and turn a $5 billion loss into $2.7 trillion in profits by 2040, so as to reach a market-standard ratio of market capitalisation, revenue and profit. The fact that numerous major banks and financial analysts are reported to consider such a scenario plausible says rather more about their business interests than about their analytical abilities.

Anyone, of course, is free to peddle nonsense as long as enough fools are willing to buy it. Every stock market bubble, in the end, depends on finding a bigger fool to take an overpriced share off your hands. As long as everyone believes in ever-rising prices, everyone can make money, and a few can even become very rich. But the laws of gravity apply to the stock market too. Sooner or later, fantasy prices are followed by a hard landing. The Minsky moment arrives. Stock-market euphoria collapses; the bubble bursts.

Musk has a global fanbase that believes everything he says without question and buys into everything he sells. The astronomical issue price of $135 per share was, in fact, three times oversubscribed. The governance structure he has imposed grants him unlimited decision-making power: a leadership cult rather than shareholder value. But here too the principle holds: as long as people voluntarily entrust their money to Musk — in the hope that he will make them richer — it may look foolish, yet there is no obvious reason to prevent anyone from following their greed and trying their luck.

It becomes problematic, however, when people are pushed, or even compelled, to invest in Elon Musk’s fantasies. Since the turn of the millennium, ETFs and index funds — passive investment vehicles that track share indices — have grown steadily in popularity. They offer a comparatively low-cost route for retail investors, particularly those with limited expertise, to share in the gains of the stock market. Many pension funds have switched to such passive vehicles, which are cheaper and simpler to manage than expensive active funds that, for all their costs, rarely beat the index. The standard products under the law on private pension provision passed by the German government will generally be such index funds.

The quality of the companies included in an index is crucial to its soundness. The S&P 500, for example, only admits firms a year after their IPO at the earliest, and only if they are profitable. Yet because so many investors want to profit from this massive IPO, Musk has managed to ensure that SpaceX is included in indices such as the Nasdaq 100 just days after listing. Once a company has been included in an index, the relevant index funds must automatically buy additional shares of that stock to continue mirroring the index in line with the prices of its constituents.

Index funds have already bought SpaceX shares worth an estimated $20 billion; the more this automatic demand drives up the share price, the more they will have to buy. When weighting individual companies in indices, what counts is not the total value of the company but only the freely tradeable portion of shares in the free float. For SpaceX, that portion currently stands at only three to four per cent of the total share volume. The more institutional shareholders begin to sell their stakes, the larger the freely tradeable share becomes — and the more SpaceX shares index funds must automatically purchase. There is, therefore, in effect an automatic demand mechanism. During Friday’s IPO, approximately 25 per cent of the shares were bought by index funds. Should the freely tradeable float rise to, say, 50 per cent in the future, an additional value of around $1 trillion in shares would reach the market, and index funds would then automatically have to buy roughly $200 billion worth of SpaceX shares. Insiders can cash in on their astronomically valued holdings, while retail investors automatically pick up the expensive shares via ETFs and index-linked pension funds.

Many ETF holders are probably unaware that their savings are ending up with Elon Musk. Nobody is obliged to buy an ETF, but in many countries even the major pension funds are now invested, to a significant extent, in index funds. As a result, many billions from pension funds will flow into the pockets of Elon Musk and other major SpaceX shareholders. And so, many people — instead of saving for their old age — become involuntary financiers of Elon’s journey to Mars.