Wall Street’s undignified SpaceX mania

Few people are abasing themselves more than America’s investment bankers. Decorative spacecraft and banners fill the lobbies of Goldman Sachs and Morgan Stanley. The spire of Bank of America’s midtown headquarters has been lit up in the image of a rocket in lift-off. The boss of JPMorgan Chase, who once feuded with SpaceX’s hot-headed CEO, has hosted him for a chummy interview in front of wealthy clients.

If that feels icky, what the bankers are telling investors about SpaceX’s business is cringe. Goldman Sachs is said to expect revenue from SpaceX’s xAI division, today an also-ran in the artificial-intelligence race, to surge from $3bn in 2025 to $322bn in 2030. Morgan Stanley apparently thinks that by 2040 SpaceX could be raking in $3.4trn in sales and $2.7trn in operating profit (before depreciation and amortisation), respectively up from $19bn and $7bn last year.

Sycophancy seems a small price to pay for fat fees. SpaceX reportedly aims to offer advisers perhaps 0.75% of the deal’s proceeds. If it sells $75bn in stock at a valuation of $1.8trn, this will net its bookrunners over $500m. That is equal to more than 20% of all such proceeds American banks earned last year. Anthropic and OpenAI, the two leading AI labs which have just filed paperwork for similarly sized listings, can expect similar flattery.

The bankers’ fees are a pittance, though, compared with the size of the deals. Giant listings generally command lower fees than the long-term average of 7% for all IPOs. Still, anything less than 1% is puny. When Goldman Sachs agreed to a 0.75% fee for relisting General Motors in 2010, this was seen as a favour to the American government, which was ridding itself of the carmaker after a bail-out.

Worse, SpaceX has neutered its bankers by reserving up to 30% of the offering for retail investors and setting its own take-it-or-leave-it price of $135 per share. This reduces the advisers’ discretion in handing out shares and turns them from power-brokers to utility providers. Who wants to date one of those?

This is quite a change from past IPO waves, when bankers were the masters of the universe. This let them flagrantly underprice IPOs, allowing their handpicked buyers to benefit from the first-day pop in the value of the shares. The average pop since 1980 has been 19%. In 1999, at the height of the last tech boom comparable to today’s AI-fuelled one, it reached a record 71%. Issuers had no choice but to lump it. Despite the Chinese walls between the banks’ rainmakers and analysts, a cheap IPO was often on Wall Street seen as a way for them to buy bullish coverage (and for issuers’ executives to secure early access to other underpriced listings).

The investment banks maintain their tight grip on IPOs. Alternatives such as selling shares directly to buyers without an underwriter have proved messy. After Coinbase, a cryptocurrency exchange, went public that way in 2021, its shares traded choppily and no similar large “direct listings” have occurred since then. But, as their treatment of SpaceX shows, today it is increasingly Wall Street having to lump it. Companies stay private far longer than they once did, denying banks advisory fees and gatekeeping power. Whizzy trading firms chew away at their marketmaking revenues. Private-credit behemoths eat into business lending.

If SpaceX’s debut flops—one big research firm’s analysis of SpaceX’s discounted future cashflows arrives at half its target valuation—the investment banks will face scrutiny, despite their limited control of the process. Yet even a success will leave them something to think about—and not just because of the icky monuments to Anthropic and OpenAI that will soon loom in lobbies like the Colossus of Rhodes. They will have surrendered control and shown themselves to be less important than they thought. “The ick” is putting it mildly.