Governance Concerns and Passive Investing

From globalization to innovation, sustainability to market volatility There's always more than one side to a story Explore different perspectives on today's most important business and economic issues with the fllipide podcast from Barclay's Investment Bank Hear two research analysts in a lively debate and get insights from every angle to further inform your view Listen to the flip side on your favorite platform stock market listing of SpaceX is coming and the hype is real. Elon Musk reckons this thing I don't know, coobbling together AI, satellites and all sorts of other stuff is worth Get this One point seven five trillion dollars Bravado is quite something Today on the show, we pick through some of the details of the SpaceX listing and ask seriously now The he This is Unhedged, the Markets and fininance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at the FT in London, which is sweltering, I tell you, under a record breaking heat wave de hydrated people Joining me Back from his travels in New York, we have the big fellllow, Mr. Robert Armstrong, Rob, say hi Hi Or you could even say Chow given that you've been on your ch. Chow Bella But we also have back on the show, Mr. John Foley, head of Lx, John Hi. Hi, Kasey. So John, you've been digging through hundreds of pages of docs from SpaceX about its proposed listing Is your favorite bit of these documents, please? My favorite bit, Katie is the dinosaurs. It's the bit that says that if we don't buy shares in SpaceX, then humans might go the same way as the dinosaurs. Is that because Elon Musk is gonna to shoot a huge asteroid at anyone who fails to purchase That's what it says. That's literally what it says Yeah. No No, what does it literally say? So the reason that Musk says that SpaceX is doing what it's doing now, is in the section called Why This Matters Now, is that they want to make sure that humans don't have the same fate as the dinosaurs. And the way to ensure that is presumably to build colonies on Mars and start mining asteroids and putting data centers in space. which the dinosaurs did not Yeah. I think that is what killed the dinosaurs in the end is lack of data centers Anyway there's so much there's so much about this But the offering document how the market is preparing for these massive IPOros? I don't even know where to begin. Where should shall we begin with this? Well let's begin so with the start, right? So SpaceX says that its mission is Build the systems and technologies necessary to make life multiplanetary understand the true nature of the universe and to extend the light of consciousness to the stars. Abious. How that cashes out, how that cashes out is well, they have a space business, which we all know about. They do thing they do send things into space and last year out billion dollars of revenue. doing that And a small loss. So the costs were four point seven revenue for loss somewhere around seven hundred million dollars. So one thing you're buying when you buy this at a valuation of one in three quarters trillion American dollars is a loss making space business Cool that is not growing wildly fast, by the way. The revenue in that business in twenty twenty five grew at under ten percent. So that's something Next business, John, what do we have? Cnectivity. This is a real business and a very good business. This is like this is today the good bit, right? This is Starlink, which is the satellite commommunications business and it's where most of the revenue and most of the profit The only profit actually comes from at the moment at SpaceX But it is growing very rapidly. It's got about ten million subscribers. it could have more than that. And the game there is putting satellites in space and hooking up people who maybe don't have access to broadband at the moment. The problem with this is that the further into emerging markets SpaceX gets with this, the lower the price it can charge. So its revenue per user is falling And also satellites and they don't really get into this in that it's hard to see this in the documents, but satellites depreciate very quickly So they last about five years and then you have to replace them So the depreciation costs for a satellite business are really high They don't actually break that down very clearly in this document, but it is something that investors will. So may it's a capital intensive. Yeah, very much. That what you're saying But just for the record, eleven point four billion dollars in revenue twenty twenty upp almost fifty percent from the year. What is that the Starlink bit? Starlink bit income from operations four point four billion So As of right now, it looks like a darn nice little business I don't know that I'm going to pay for one point three onene and three quarters trillion US dollars for it. but Moving on Isn't there a third business in here somewhere? Yes. Well, the third bit is the AI bib. That's Grock That's' Grok Colossus Colossi, which are the data centers that he's built. That is aoney Money burner. It is a huge pile of burning cash. So that is that three point two billion dollars in revenue in twenty twenty five a loss of six point four billion dollars. so The first amazing fact that we need to flag here is not the dinosaurs, it's the fact peopleople are lining up pay one in three quarters trillion dollars, which would make this, I don't know ten biggest stocks on Wall Street, right? Num seven. Number seven or something like. So for a seriously losost making business. We worked out that it would be the seventh biggest company in the S and P five hundred. But if you look at it in terms of revenue, would be about the two hundred fiftieth, it would be the same size as General Mills, which makes lucky charms. Breakfast cereal. But you got to think big guys. So like in the prospectus, in all the documents the company says that its total addressable market is twenty eight point five trillion dollars, which is like. A lot. To scale that world GDP is about one hundred twenty five trillionllars So the addressable market is a fifth of GDP And it's basing this number on something at least in part from something called the Digital Cooperation organization. brackets. Nope, me neither So there's kind of quite an obscure kind of body that's not backed by the US or most European countries that's come up with this number and they're kind of running with it So First of all, like there's like there's big ambition here. It's all kind of yes, let's live on Mars, light of consciousness, twenty eight point five trillion dollars, yada yada. But actually quite a lot of the sort of financial engineering about this is almost more interesting because it's like Guys, what are you what are you doing here? There's a lot of Creative stuff going on with how this company works John, Katie, let's ask a simple question Is it mad pay one and three quarters trillion dollars for this loss making business Is it just is that just insane on its face? John? So I approached this question sort of backwards by thinking what would make it not mad Yes Because it is obviously mad. Let's just be clear about the fact that it is matter, but what would make it not mad? O So if you look at it's trading, this will be trading at about one hundred times sales, right A bit less than that Is anything else trading at one hundred times sales? Well, like some biotechs are, Cerebrus, the chip maker that listed the other day is trading at one hundred and ten times some quantum companies, like very speculative things So there are precedents for companies str. Those are smaller. They're smaller and they're very speculative. Yeah, this is going to be like as you say, one point seven by trillion. The other way of thinking about what would make it not mad? That market that he sees as being worth twenty eight point five trillion SpaceX can get about three percent of that market. then it's not moued M bo of back of the fact packet maths.. As Katie points out that market may be completely made up because it's from some body that we've never heard of. Also there's he gets a bonus if he gets the company to seven point five trillion. And if you think that he can get it to seven point five trillion in ten years, then what he's asking now is not mad. Musk does have form for making really outlandish predictions about how his companies are going to develop, right? Wasn't he saying that Tesla at one point was going to be a seven trillion dollars company? He's clearly not that. Yeah, he's talked about Tesla being at least ten trillion do. I think he once he once said that he once said that it could potentially be worth hundred trillion. U He said with like with a prevailing wind. Before I chokeess could be worth on the cynicism of YouTube Bits I would like to say that it is important separate Carnival Barker, Elon Musk and the business buildilder, Elon Musk. And I agree with you, the Carnival Barker side of him is very unattractive character Business Builder is a very impressive character. That's fair. He built the first viable independent electric car company car company might not be going doing great right now, but it changed the market for electric cars in the world. built Starlink, which is a major part of the world's communications apparatus And he's built a real business shooting stuff into space These are really impressive things And I think The non crazy bit. is paying up for this IPO is this is the guy who builds stuff successfully. Right? So it's not as if I am trying to sell this to you. thenen it would really be crazy You know this is a guy who's built some stuff So that would be my positive case I mean, to answer your question, Rob, I think yah it is like plainly on its face ridiculous for this company, even despite that sort of potential to have this sort of valuation straight out of the gate. This is assuming that it does get that valuation straight out of the gate. But Let's move on to the financial engineering that's taking place to make sure it does get to that valuation. Yes, let's do. This is I think this is the most interesting bit of the story. There is some wild stuff going on. Yeah. on the side of the kind of Wall Street apparatus. The indexes And the exchanges are really bending over backwards to make sure that this one works, this offering works Yeah the thing that kind of knocks me out of my chair is They're let they're letting this company into the indexes sooner Right And they are letting it be represented weighted in the index in a way that was not allowed before Right? So they're changing the rules of entry accommodate this company. and to me This is like, do you guys want to go to court if this goes wrong? Like is it like I've always wanted to be questioned by a senator on national TV. You know, it's like, what do you guys doing? Yeah It seems very sporty There's two types of ways to invest in the stock market, right? One of them is you do stock picking, you choose individual stocks that you want to buy and some of stocks that you don't want to buy and you just build your own portfolio Overwhelmingly the much more prevalent way that people invest in markets is to buy an index product, something that just tracks an index, is this passive investment It's a divisive issue. someome people hate it, someome people love it Yada, yada, whatever point is. M mostly we love it. It's the Mostly, we love it. Yeah, it's a really low cost easy way of just buying an index And so NSDAQ has already said that on one of its heavily tracked indices, that SpaceX will have a fast track Footy Russell and SMP are looking at it. They're reviewing it. If I was a betting person, which I'm not, I would say, they probably will choose to include it So as you say, it means that the speed with which it will enter this index or potentially these indices is going to be much quicker And it's going to be able to do that even though the amount of the company that's actually getting floated on the public market is tiny. So It' It's a one point seven five trillion dollars company, Musk thinks. But he's listing what is it? seventy five billion of it, something like much smaller. There's so much in what you just said. Let's start with the timing issue The traditional thinking was we don't really know how much a company is worth until it's banged around in the markets for a while And a lot of investors have had a chance to get a look at it it kind of finds its natural price range And for this reason, companies that are newly listed tend to be volatile. And that's sort of the justification for not jamming them into the big indexes right away becausecause you have this big floppy, unpredictable thing acting all crazy until it kind of finds its feet in the market rushing it into Big indices is like Who cares about all that We need a lot of passive demand for this product It needs to be in the big indexes as fast as possible. So all the passive buyers in the market will own the thing Is that bas Is that a fair description, John Have I done that think I think the case for tweaking the rules is that indices reshuffle on a regular basis. in the NASDQ case, every once a year, they decide what's in and what's out. If SpaceX lists in May And NASDAQ doesn't reassess its membership until December. You've got like six months in which the biggest not the biggest company in the world, but like the seventh biggest company in the American market is not reflected in the index. And so they can with some plausibility say, you know this would be a real anomaly and it would be a distortion and so on. Okay Let me just do the basic challenge to that you, right? which is easy, but you have a nenomenally one in three quarters trillion company there is only five percent of it or whatever being listed, know, or ten percent of it or whatever it is you have a scarce number of shares relatively speaking, right? That means their price is going to be high. And so to determine the value of the company, you multiply price on these quite scarce shares by an enormous share count that represents the whole company And so Who's to say it's the seventh largest? If you're only floating a small percentage of the shares You can't just do that multiplication and declare this is the seventh largest company. That is totally correct. markarket caps are not real, notothing is real, birds aren't real. And I would distinguish between flexing the the seat what they call the seasoning requirements that you talked about and the date of inclusion versus this really odd thing about giving an extra weighting to under you know to thin float compomanies which does seem to me to be not great and also incentivizes companies to have low floats. But all of these work things work together. spepeed of entry into the index. how it is weighted in the index relative to the actual float of its shares Other factors we can also talk about All of this basically allows for the speedy transfer of risk in this company compompany insiders. Joe and Jane public Well, let's talk a little bit about that as well, because normally when a new company comes to market, those insiders who have some equity in the company to start with, they have these lock up periods, which are generally quite long, which means that they're told, you can't sell your shares for a certain period of time. Again, you have to let this thing like settle down on the market before you sell up In this case, some of those insiders have an accelerated path towards getting rid of some of these shares So it does sort of somewhat smell like insiders just want to like get rid of this stuff and shove it onto retail investors. That does be the cynical view here. It's also though the lockups are kind of slightly overstated in the sense that you can always sell early if the underwriters let you So it's not a rule that you can't break the lockup, it's just like Golden Sachs and Morganany, whoever, if they give you permission, you can You can So maybe this just reflects reality they would have let them out anyway. I think the larger context here is that changes in rules and longstanding practices are happening at a moment. when The valuation of the whole market is extremely high and that valuation is supported by a small number of companies that have extremely extremely high valuations cllustered around AI, which this is one I could give you my long, tiresome lecture on You neverever Know When You're going to have a correction in an overvalued market et cetera, etcetera. It doesn't matter. But This is going to look awful if the correction comes this year Right. Wall Street has floated this historically large deal Rules have been changed on the left and on the right to make it all happen There is going to be widespread ownership of this thing. And if it turns into a turkey We're all going to court. And it's going to that's what the story is going to be. I'm just saying that R? And you know, things happen and buyer beware and nobody's forced to own anything. they don't want to own. And we're all grown upps here. But if you are Any of the underwriters of this thing, you better have all ten fingers and toes crossed that the AI bubble doesn't pop in the next twelve months because if it does They're going to be doing discovery on your emails The other kind of element of the documents that sticks out here is like Governance schmovennance, right. So basically this is the Elon Musk show. He basically can't be removed from his position. He gets to overrle his board on whatever He likes. It's hard to sue him. Very hard for shareholders to sue him So a bunch of US pensions have got together and called it the most management favorraable governance structure ever brought into the US public markets at this scale. Facebook, now meta, Google, now Alet also have these structures But I sure wish they didn't. I think they're unfair and anti capitalist and They are against motherhood and apple pie I I'm a pro disclosure libertarian on this topic. Like if I agree with you in the sense that I wouldn't want, I think it's foolish to buy shares in a company where someone has and there are worse structures than what Musk has, by the way. There are companies where the votes that the founder has go up as they sell their shares to make sure their control stays the same. If you buy shares in that company, you have only yourself to blame if the foundounder does something stupid. Yeah. But if it gets plonked into the index product you own, then you know, you're screwed, aren't you? That is the issue. We've been telling retail investors quite rightly for thirty years now since John Bogl and Vanguard and all the rest The right way to invest is with passive products And that is true. It is the right way to invest capture the open return of the market without taking individual company risk, diversif, etcetera, etcetera. And that's been the best financial innovation that we've had in hundreds of years, hundred years The downside of that is You're going to have you can't discriminate I can't say when I buy my S and P five hundred index product. I'd like the S and P five hundred Without that stupid meta and it's dual class shareholders. Why can't you do that? Why can't there be a tracker that says we only invest in companies without dual class shares, or we only invest in companies that Elon Musk doesn't run. You could launch that tracker and no one would buy it. But But there's no reason you can't have an S and P Space X. And if people want that, then it should exist and will exist. And there' just complexity The beauty of the whole thing, the beauty of the vision passassive investing is that it was just dead simple. and you didn't have to think about it and whatever. It's a dumb product for dumb people. It's free money. And if you make the world complicated in certain ways Beautiful simplicity is drained away. This sounds like a case of insitification.. So this thing is going to happen. whether you like it or not, you may as well get ready for it. Another thing that is gonna happen whether you like it or not is long short, so we'll be back in a second Globalization to innovation, sustainability to market volatility There's always more than one side to a story. Explore different perspectives on today's most important business and economic issues with the fllipide podcast from Barclay's Investment Bank Hear two research analysts in a lively debate and get insights from every angle to further inform your view. Listen to the flip side on your favorite platform O doke. Now it is time for long short that part of the show where we go long a thing we love or short a thing we hate. John, what have you got? My, I'm going to go long at horror films or movies as we call them here because I'm a hugeorror film. Me too I't know that I'm glad we have that in. I think we might be entering a golden age of horror movies. I went't see obsession yesterday, which is brilliant and like very low budget and We've had it We've had this year already a few really good movies. and I think because the zeitgeist, the theme of twenty twenty six generally is horror, Like just life is horror Yeah, I think we're gonna haveave watch Have you watched Widadows Bay on Apple? No, not yet. It's very good Katie, what do you have for us horror movies is too scary. I am longong the Enhanced games you know, the thing it's like it's like the Olympics but on steroids and everyone's allowed to have steroids And it was touted as it's going to like smash all these world records and let's see what the human body could do if we pump it full of juice. Anyway Only one world record has been beaten, not that it will be recognized by the world record people. It was fifty meters freestyle men's competition. The contestant managed to squeak ahead of the official world record with loads of dope and with some sort of special swimming costume that you're not allowed to wear in the proper sports also multiple people who have won events there who were not doping That's very disappointing Very disappointing the organizers. Yeah veryer amusing to me. Yeah, of course. I wonder why so they're just there to make a point Yeah, well, also the prize money is massive. So some of them are like, sod it, I'll do it. Ill just So one of them who won an event said Man, they gota do better than that. They need to train a little harder. Get on that shit a little bit more. H Good trolling. I find myself surprised to be long. The Iranian news media. Be I find myself reading these articles in the FT and in other newspapers about what the developments are in this war Of course, you can't believe anything the Trump administration says because they just make it up. Oh, it's we're almost have a deal. We don't have a deal. We're going to drop bombs. And you have to go down four paragraphs to find out what the Iranian news media is saying get some sense of what actually might happen. So, you know, a lot of bad things have happened in this war, but it may have brought the Iranian news media into a kind of golden age Yeah.