Wall Street’s New Homecoming Queen

Every high school has one—the Homecoming Queen.

No offence to former homecoming queens reading today’s dispatch—I’m painting with too-large a brush, I know—but she generally wasn’t the girl headed to MIT and a PhD in economics.

She was just a popular and pretty girl who captured more votes than others on some particular school day.

By which I mean… SpaceX was destined to disappoint early investors.

The largest initial public offering in history is now trading below its debut price from earlier this month, and has come down more than 30% from its intraday high just over a week ago. The fanboys who dove into SpaceX because Elon Musk was going to have Martians running AI code or whatever are now sitting on losses—some of them bigger than a breadbox.

There’s a message in that for all investors: a “great company” doesn’t necessarily make for a “great investment”. It’s far better to focus on valuation than to rationalize an investment based on “Elon is brilliant so I’ll invest in him.”

The problem there is that Wall Street functions a lot like a homecoming queen contest: The most popular girl wins the day. That doesn’t mean, however, that she’s worthy of MIT admission.

Elon’s rocket company launched onto the NASDAQ back on June 12. The IPO was priced at $135, but the shares opened trading at $150, closed the day at $160, and then shot to nearly $226 in intraday trading a few days later.

Days before the IPO, I posted a video to my TikTok page noting that the shares were stupidly priced at nearly 100x revenue (Nvidia, far more profitable than SpaceX, is priced at just 20x sales, and even that is extreme by any sober measure). Patient investors, I noted in my TikTok, are going to be able to snap up SpaceX shares at a substantially lower price one day.

That’s not a comment on Elon or the company he built.

It’s a comment on what I’ll coin the Homecoming Queen Phenomenon—the most popular girl grabs the tiara for no other reason than her popularity.

I watched and reported on this same phenomenon while working for The Wall Street Journal during the dot-com mania of the late-90s. Investment analysts had no way to price profitless internet companies, so they made up cornball metrics and Wall Street pretended it was wizened analysis… price-per-eyeballs, price-per-clicks, valuation based on page views.

All of it was always just vapor waiting on a stiff breeze to blow it away… and we all remember what came next. A hurricane of financial pain as boom morphed into bust that saw internet stocks go bankrupt while winners like Amazon fell 94% or more.

SpaceX/Elon fanboys are doing the same today. They’re pricing an exciting narrative, and totally skipping out on the cash flows. Story only goes so far, and it doesn’t pay salaries.

I’m not saying SpaceX is a bad company. Maybe it’s the future of mankind; who knows?

Meanwhile, some of the best investments are usually the companies nobody’s arguing about over cocktails. They’re the boring businesses quietly fixing balance sheets, growing earnings and trading at valuations that don’t require the second coming of Steve Jobs to justify them. One of our own best-performing positions in the GIL Portfolio over the past 15 months has been Intel. Hardly the glamorous choice in a world obsessed with AI moonshots and Mars colonies… Yet while investors were busy chasing the latest Homecoming Queen, Intel has become a big play on AI, just as I said it would, and it has rewarded us with a gain of more than 530%  over the last 15 months or so.

But in contrast, the SpaceX IPO was never measuring value — it was measuring the exuberance of people who were going to vote for a particular homecoming queen no matter what.

Every bubble in market history has eventually reached this same moment, when the popularity contest is over and everyone moves on with the rest of their life. The euphoria fades and all that’s left is a tin tiara missing a few cubic zirconia, and a homecoming queen’s memories of a time she was really popular.

We’re not there with SpaceX just yet, and maybe we never get there. Maybe SpaceX rebounds from this selloff and grows ever larger.

I’m not betting on that, though.

The valuations are too reminiscent of the dot-com era before the headlines started popping up calling the internet a flop (that was a real headline, by the way).

But still, I will probably be a buyer of SpaceX…

One day…

When the price is under $20, which I suspect is a likely destination. That would put the shares under 20x sales, which I deem fair enough, given what I said above about Nvidia.

Back in the formative days of my investment education, I read Benjamin Graham’s 1934 classic, Security Analysis, still the bible of value investing today. Graham best articulated this idea over the years and which nobody has improved upon since: In the short run the stock market is a popularity contest; in the long run it’s a scale.

SpaceX spent its first week as homecoming queen.

But now it’s time to step on the scales.