I think it'll be very volatile, and I think that's going to add a lot of volatility to the market because when you don't have a valuation backdrop, when you don't have comparables, then to your point, it can trade at 95 times revenue. It can trade at 50 times. It can trade at 150 times. There's no rhyme or reason. It really is about how many people buy into that vision and continue to hold on to that vision. And there's the excitement that we're going to have tomorrow. There's going to be the lockups, very significant lockups after that. There's going to be index inclusions. There's going to be index non-inclusions. We should expect more volatility in this stock than anything we've seen in a stock of this size. And again, it's going to also have a big impact on the market. It already has.
Welcome to Prof G Markets. I'm Ed Elson. It is June 11th. Let's check in on yesterday's market vitals. The major indices all tumbled more than 1.5% after President Trump expressed frustration that negotiations with Iran were taking too long. The S&P 500 hit a five-week low, and then after hours the US began striking multiple targets in Iran, at which point the price of Brent crude climbed. Meanwhile, the yield on 10-year Treasuries was mostly stable despite the hottest inflation report in three years. More on that later. Okay, what else is happening?
It is a monumental week for the AI industry. SpaceX is expected to price tonight and will begin trading on the NASDAQ tomorrow in what will be the largest IPO of all time. Currently, shares for SpaceX are more than four times oversubscribed, implying at least $300 billion in investor demand. Meanwhile, OpenAI filed confidentially for its IPO earlier this week, hot on the tail of Anthropic. So, very soon, the public markets are going to get an unprecedented look into the business of AI. In the meantime, we got a preview of investor sentiment on AI from Oracle's earnings last night, which sent the stock plummeting 8%. For more on what is next for the AI trade and also his thoughts on the SpaceX IPO, we are speaking with Gil Luria, head of technology research at DA Davidson. Gil, it's good to see you. An unbelievably important week for the markets here. And I think we got to start with SpaceX. $1.77 trillion valuation. It's priced at 95 times sales. I've made my opinion on the matter quite known to our audience. I think it's overvalued, but I'd love to hear your views.
My view is going to be more descriptive than prescriptive. When I've been following Elon Musk companies for more than a decade, they rarely trade on fundamentals. They rarely trade on the same valuation metrics as other companies. And I've thought about why that is. And I think the answer is that Elon has this trick that he plays. He has the business that he has today, the business that's on the come, and then the big dream business. So for Tesla, the business he has today is selling cars. The business that's on the come is robo taxi, and then somewhere down the line there's Optimus robots running around. The equivalence for SpaceX is right now we have Starlink. Soon we'll have orbital data centers, and then eventually we're putting a million people on Mars, right? And that allows him to get away from having his companies valued on the fundamentals of what he has today because there's always something bigger coming near, and then something even bigger coming long term. And that's how he does it with Tesla, and he's been successful doing it with Tesla for a long time, and now it seems to be working for SpaceX. Having said all that, I think it's great that you're cautioning people ahead of tomorrow. Buyer beware.
Yeah, I mean, I guess I'm skeptical how many people will actually believe in that story and the putting people on Mars. I mean, it's one thing to say we're going to put these humanoid robots into the world, which by the way, at least they've shown some models of how it would look. But putting people on Mars, to me, it starts to go from optimism to delusion. And I'm skeptical of how many people actually believe this thing is actually going to happen. And I guess my thought is that we're going to see a lot of selling activity at least when these lockups start to expire. So how do you think the stock will trade over the course of the day and I guess in the next weeks and months as well?
I think it'll be very volatile, and I think that's going to add a lot of volatility to the market because when you don't have a valuation backdrop, when you don't have comparables, then to your point, it can trade at 95 times revenue. It can trade at 50 times. It can trade at 150 times. There's no rhyme or reason. It really is about how many people buy into that vision and continue to hold on to that vision. And there's the excitement that we're going to have tomorrow. There's going to be the lockups, very significant lockups after that. There's going to be index inclusions. There's going to be index non-inclusions. We should expect more volatility in this stock than anything we've seen in a stock of this size. And again, it's going to also have a big impact on the market. It already has. We've seen a lot of capital taken out of a lot of other technology stocks, a lot of the rest of the AI trade in order to fund this because if they're issuing $75 billion and it's four times oversubscribed, that means investors have $300 billion ready to invest. They're not going to get their full allocation, but they have to have it in cash just in case they do. So, a lot of capital's already been pulled out of the market, and we're going to have to see what happens in order to perpetuate this.
Yes. Plus, you've got OpenAI coming up. You've got Anthropic coming up. You've got Google's $85 billion equity offering. You've got Meta supposedly considering a similar thing. You've got Oracle, which we could get into, which just announced a $20 billion equity offering. I believe $20 billion in debt as well. It's starting to get to the point where there is so much stock being issued into the markets, injected into the markets. I'm not totally sure if people even have the money to buy all of this stuff. And if they don't, then they're going to have to sell their existing positions. It sounds like you believe that that is what is already happening. And that might describe why we've seen some of the drawdowns in some of the larger tech names over the past few days. Is that what's going to happen? And do you think it could get, I guess, worse?
Yeah, there's going to be a lot of sloshing around of capital. And the reason is, part of the reason, and this is going to happen even more so when OpenAI and Anthropic go public, because SpaceX is bigger than AI, right? It's about space exploration and expanding consciousness into the stars. A literal quote from the S-1. But OpenAI and Anthropic are the pure plays on AI. So if so far in the market you've invested every other way in AI by buying semis and optical and nuclear and quantum and all these other ways to invest indirectly in AI, now you're going to get a chance to invest directly in AI. And so again, a lot of capital is going to be pulled from the rest of the AI trade into OpenAI and Anthropic. And part of this is a race because you mentioned the mega caps are going to the capital markets. These three IPOs are happening. Each of them wants tens of billions, maybe even a hundred billion dollars to raise. There's a finite amount of capital that could come out of everything else. And so to some extent, this is a race. I think when we heard what OpenAI said when they filed confidentially is we'd rather stay private, but we understand that we may need to go public, which is code for we may need to beat Anthropic out or at least be soon after Anthropic because we don't want them to drive a narrative to drive how disclosures happen, what metrics get reported. So a rush to capital right now from all these big players.
Yes, which implies something which seems to me to be quite important, which is if they're racing to sell now, that's because they believe if they sell later, there will be less available capital and they won't be able to command the prices at which they would like to sell today. So SpaceX seems to have timed it great. But the further you go down the line, it seems that these CEOs like Sam Altman believe there might not be as much capital available later down the line, which makes me feel a little bit bearish to be honest. It makes me think that maybe we're at the top. They think that now is the time to sell clearly because that's what they're doing. It makes me think maybe look out below. What do you think about that thesis that potentially this IPO race, this IPO mania could signal the top, at least for the tech sector?
I'm a little bit more optimistic from the overall perspective because I actually think the AI models are very powerful and they're getting a lot better. The folks that have been using Fable from Anthropic over the last couple days are saying that's another big leap forward, and we're already getting a lot of good usage from the other AI models. At the end of the day, this is what matters. Are consumers going to pay subscriptions for AI? Are companies going to pay for the tokens coming from these AI models? As long as that happens, we're going to continue to see growth. What these companies are doing, they're racing to capital. It's not necessarily that they're saying that their valuations are peaking. They're saying what you said earlier, which is if I don't get the capital now, it may not be around later because everybody else will have stood in line first. This is a game of kings and queens. You can't participate in AI without tens of billions and hundreds of billions of dollars. And if you think that the capital is going to run out at some point, you want to be early. By the way, also compliments to Google for being early with the very big fundraise this week. And again, I wouldn't expect Amazon and Microsoft to linger in the background. They understand this is a race. They understand that they're starting to exhaust their operating cash flow and they will need resources in order to keep building the AI compute data centers.
Final question, and then we'll let you go. And I don't know if you're going to answer it because you didn't quite answer it before. Do you think SpaceX is overvalued or undervalued?
I try not to do that with the Elon companies because I don't think their valuation has ever made sense. It's never had anything to do with fundamentals. So if people are buying a dream and a story and hope, and sometimes that works out. It sure did work out for Tesla holders that bought the stock 15 years ago.
It did. It did indeed. All right. Gil Luria, head of technology research at DA Davidson. Gil, thank you so much. Appreciate your time.
We'll be right back. And if you're enjoying the show, be sure to subscribe to the Prof G Markets YouTube channel at the link below.
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We're back with Prof G Markets. Inflation rose 4.2% in May from a year earlier, the hottest reading in three years. Fuel oil is up nearly 60% from a year earlier, and airfare is up 27%. And for the second straight month, real wages fell, meaning prices are rising faster than paychecks. The report has investors rethinking the Fed's path ahead. The odds of a rate hike before the end of the year are now around 50%. Joining us to discuss this inflation report, we are speaking with our friend Mark Zandi, chief economist at Moody's Analytics. Mark, thank you for joining me on the show. It's always good to see you. I guess my first question here, 4.2%. I mean, this number is staggering to me. Seems like it's all Iran. Is that right?
Ed, good to be with you. No, it's more than Iran. I mean, obviously Iran's a big part of it. The bulk of the inflation acceleration is energy prices. But it goes to the tariffs. There's still some tariff pass-through. It goes to the restrictive immigration policy, which is having an impact on different industries and causing sticky service price inflation. And also AI, artificial intelligence. AI is juicing up demand, you know, the data center infrastructure buildout, consumer spending because of the wealth effects. But it's not lifting supply, at least not yet, to any significant degree. The productivity boost so far has been pretty small. So more demand, not as much supply, that adds to inflation. You can see it in electricity prices, you can see it on chip prices. So there's a lot of stuff going on here. Inflation is up for a lot of different reasons, but the bulk of it is the Iran war.
I guess the next question is how long is this going to last? I mean, it's been going up and up and up. If we stick around at 4.2%, I mean, we're over two percentage points above the Fed's target rate. This problem only seems to be getting worse. And I think the question on investors' minds is how long is this going to persist?
Well, it does depend on the war, right? I mean, if the war is kind of close to peaking, winding down here, and oil prices are not going any higher, they're around 100 bucks a barrel, if that's where they stay, come in a little bit, then the worst of the inflation is behind us. But, you know, there's no going back to the kind of 2% inflation rate that the Fed would consider to be appropriate, you know, comfortable for a long time. I mean, when I say a long time, Ed, we'll be talking a year from now, inflation will still be above target. Maybe two years from now, even if everything sticks to script, including the Iran war winding down. So, this is, you know, we might be past the worst of it, but we're not getting back to where we were anytime soon.
Do you think it will get worse? This is the thing that I'm not sure what to expect. I mean, we saw back in '22, we saw a similar thing of inflation kind of ripped back up. It went as high as 8, 9%. It got really bad. I mean, how much worse do you expect it will get in this round of inflation?
Well, I do expect the president to come to terms with the Iranians and open up the strait and get production, oil production ramping back up again and oil prices moving south again. So, I think that's the most likely scenario, but as you were alluding to, there's a gazillion different scenarios here. And almost all of them are worse than the baseline, you know, inflation being higher for longer. The one thing I do think that we need to watch though to answer your question is inflation expectations. I mean, if expectations for inflation continue to rise, particularly bond market expectations, then the risk is that this inflation becomes more persistent, more entrenched, and obviously has big implications for what the Fed's going to do. So far, you know, inflation expectations, they're on the high side of where I think the Fed would feel comfortable, but they haven't kind of breached, you know, up to the upside. But that's something to watch to answer your question.
Just to again theory this out, like let's imagine a world where Trump does not figure out how to negotiate with Iran. The strait remains closed or the situation persists as it is. It's hard to tell whether it's closed or open or who's blockading what. Point is, not going great over there. That's all we know. If it remains as is, call it for the next six, nine, twelve months, does the number get worse and worse and worse, or do you expect that it will plateau at some point?
