Key Points
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Following SpaceX’s IPO, Elon Musk will own shares that give him more than 80% of the company’s voting power.
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Musk’s leadership of the company actually creates a valuation premium, but there is still significant risk.
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Musk’s high level of skin in the game means he is incentivized to help raise SpaceX’s valuation.
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SpaceX’s June 12 initial public offering (IPO) will be one for the history books. The company is set to sell 555,555,555 shares at a price of $135 per share in an offering that will raise $75 billion and value the company at approximately $1.77 trillion. In terms of market capitalization, the SpaceX IPO is poised to shatter records and make the space-tech specialist by far the largest public market debut in history.
But while SpaceX will sell a substantial tranche of shares on the public market, it’s clear that CEO Elon Musk will retain a virtually unassailable position in the company’s voting rights. Even with the stock sale, Musk is poised to control roughly 82.4% of the company’s total voting rights through his ownership position in the space stock. Is this a positive or a negative for investors?
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Musk will have singular power in determining SpaceX’s direction
With Musk set to retain more than 82% of total voting power at SpaceX, the CEO will command a large majority stake that ensures he will have final say in shaping the company’s operations and future. On the one hand, there’s a certain amount of risk inherent in one person controlling such a dominant position in a company and having a singular say over its strategies and operations. Even among highly scrutinized leaders in the tech industry, Musk also has a reputation for generating controversies.
On the other hand, Musk’s controlling stake in SpaceX also means that the CEO has a lot of skin in the game. With the CEO owning a large majority stake in the business, he stands to benefit if the company’s valuation soars. Along those lines, his priorities and incentives should line up with those of other shareholders. Musk stands to win big if the stock soars over the long term, and that sets up an incentive structure that looks favorable for the shareholder base at large.
Love him or hate him, Musk also deserves and receives credit for being a technological visionary. In addition to his role in facilitating progress for tech trends, including fintech services and electric vehicles, SpaceX has pioneered and revolutionized the commercial rocket launch space and built a thriving telecommunications business through its Starlink imprint.
How does Musk’s control affect the investment thesis?
Notably, Musk’s status as CEO also confers a substantial valuation premium. With a market capitalization of roughly $1.53 trillion, Tesla (NASDAQ: TSLA) trades at approximately 199 times this year’s earnings and 15 times expected forward sales. Were it not for Musk as the company’s chief executive, it’s hard to imagine the company commanding that level of valuation.
Musk’s track record is far from perfect, but it’s probably not reasonable to expect perfection when operating at the forefront of breakthrough technologies and services. Even though his track record may be far from immaculate, Musk has shown an impressive ability to pivot in a timely fashion and energize support among his shareholder base.
So even though his control of 82.4% of the company’s voting rights could raise concerns among some investors, Musk’s high level of skin in the game and active role in directing the company’s future suggest that he will work aggressively to bolster the company’s valuation.
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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.
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