Today's number: 90. That's how many seconds Russell Brand spent trying to find his favorite Bible quote live on Piers Morgan before he finally gave up. The former comedian was on the show to discuss his new book, How to Become a Christian in 7 Days. Sources say step one is to be accused of sex crimes.
Welcome to Prof G Markets. I'm Ed Elson. It is April 28th. Let's check in on yesterday's market vitals.
The major indices were mixed as Trump considered a proposal from Iran to end the blockade and open the Strait of Hormuz. The S&P and the Nasdaq edged up to new records while the Dow fell slightly. Meanwhile, oil prices rose and Microsoft stock fell early on the day on a renegotiated deal with OpenAI. The stock later recovered to end in the green. More on that later.
Okay. What else is happening?
SpaceX is gearing up for the biggest IPO in history, but investors are starting to wonder what exactly they are being asked to buy. The company is targeting a $2 trillion valuation, which would instantly rank it among the largest companies in the S&P 500. But this is no longer just a space company. It's also a satellite internet company, a launch company, and increasingly an AI company with new bets and new acquisitions adding to the story. And for all of the hype, there are real questions hanging over what would be the market's biggest event in years. Such as, can space-based data centers actually work at scale? What happens to Elon Musk's control once the company goes public? And ultimately, can that $2 trillion valuation be sustained in the public markets? Well, here to help us answer many of these questions, we are speaking with Patrick Boyle, professor at King's College London, former hedge fund manager, and host of one of the most popular finance YouTube channels. Patrick, so good to see you and so glad to finally have you on the show. I wanted to speak with you because this SpaceX IPO is set to be one of the most important events in a really long time in the financial markets, and you recently released a video titled, quote, 'The SpaceX IPO Scandal.' So I will start with the obvious question, which is why did you describe this IPO as a scandal? How is this company being sold to investors? What are you skeptical of with this IPO?
Well, the thing that's quite questionable about the way this IPO is being done is just the way that it is being forced into the Nasdaq 100 index almost instantly. I think there's going to be a 15-day delay, and also the weighting that it'll be given is much higher than you would expect for a company with a very low float. So in a funny way, the company goes public at a very high valuation. People will probably buy in. Firstly, there's a lot of people who are just very excited about Elon Musk and his companies. They'll put money in, but then the expectation is that the indexes will be buying 15 days later. You know, at the current valuation, they're talking about it would have a 4.12% weight in the Nasdaq 100. There's also been talk about possibly S&P pushing for early inclusion as well. And that would essentially mean that there's just a frenzy of it being bought up, stuffed into the portfolios of people who index who are not really valuation sensitive. And the valuation they're talking about, to be clear, they're talking about 125 times sales. So that's not earnings, that's sales. And we don't even really know what the earnings are of SpaceX. Reuters published that they had EBITDA of $8 billion. But EBITDA is not earnings. It's earnings before essentially the cost of building satellites and building rockets, you know, which for SpaceX you have to imagine is a significant cost. There's a famous quote from, I think, around 2002 where Scott McNealy, who was the CEO of Sun Microsystems, spoke about, you know, the price that people had invested in Sun Microsystems at, and he said, well, you know, what were they thinking? They invested at 10 times sales. And he said, you know, if you put your money in at 10 times sales, in order for me to return it to you in 10 years' time, I have to pay all of the sales bills out as dividends, and that assumes that I'm not paying any staff, that I have no R&D cost, that there's no manufacturing costs. He said there was no way people were going to get a return on investment at 10 times sales. Now we're talking about 125 times sales, and you know, it's worth noting as well that SpaceX is an exciting company. It is growing, but analysts expect it to grow 25% next year. That's not good enough. Like, Google went public, I forget how long ago, but they were growing at 240% a year and they went public at 10 times sales once again. And so the question isn't whether it's a good or a bad company. A bad company can be a good investment if you get in at a low enough price. And an amazing company can be a terrible investment if you overpay for the stock.
So much in there to unpack. I mean, I guess let's just focus on the price for a moment. Why is it, I mean, when it goes public, you could imagine a world, if we lived in an efficient markets world, you could imagine a world where investors would say, $2 trillion, that's ridiculous. I'm not buying, and the stock immediately plummets, in which case maybe it's not a problem. It seems as though in the private markets there seems to be a little bit more BS available and you can command these kind of ridiculous valuations, I guess because the negotiations are a little bit more entrenched and Elon just says 2 trillion and we say whatever and we sign the contract. But I feel like there's a bit of a, it's a harder bar to hurdle to get over in the public markets. So, I'm with you on all of this, but I wonder if maybe there's an argument to be made here. Well, if it goes public, the markets will decide what the true valuation is. That is the purpose of markets, is to essentially weigh these companies. And in the long run, it doesn't matter like that. In the long run, a good company that grows earnings will go up, and but of course in order to go up more than the market, it needs to surprise to the upside, right? Like a company needs to be better than people thought it was to perform better than the market. If people are right about how good the company is, well then it would expect to get, you know, standard stock market returns. So when you go public at such an extreme valuation, I mean the likes of which has never been heard of before, you know, it's funny because there's some analysts out there and they're saying, well, there's nothing to compare it to. And you know, you can compare it to aerospace companies. You can compare it to technology companies. You can compare it even to, we'll say, just companies like Nvidia that have a product that there's a lot of demand for. And you know, and then you'd say, well, how much is Nvidia growing? How much will SpaceX grow? Blah blah blah. But, you know, the problem is there's nothing to compare it to. If you go with a valuation like this, if you went with a more, I don't know, moderate or, you know, earthbound valuation, there's plenty to compare a company that is an internet service provider, you know, a very small AI company, and, you know, delivers payloads into space.
Right, it almost seems as though, I mean, the markets will decide what the valuation is, but thus far they have taken a few kind of shortcuts to achieve this valuation, and it seems that some of those shortcuts would include talking about data centers in space and talking about the future, and then merging xAI and putting that into the company, and then buying Cursor and putting another AI company into the thing so that you have to keep on growing and growing and growing. And then the other point that you make, which up until now I hadn't thought properly about, is the idea of just shortcutting your way into the Nasdaq, which I assume immediately puts more buying pressure on the stock because it's essentially inserted into people's portfolios, many 401ks throughout the country, thus resulting in an elevated valuation. Hence, it seems like that's kind of where the scandal is, that we're employing all of these strategies to almost fake it.
So firstly, Nasdaq had to change all of their rules to allow this inclusion because normally a company needs to be, you know, there's a list of rules as to how they weigh, you know, a low-float company going into an index, how long it's been public, because the idea is it needs to be seasoned in the market and sort of find a valuation with real buyers and sellers. So normally you would expect it to take about a year at least to even consider adding it. 15 days is unheard of. And then getting rid of the caps for the float on it. And you know, Reuters reported that this is because Elon Musk negotiated with Nasdaq and said, you know, we can list this thing on the NYSE, we can list it on the Nasdaq, we can list it wherever we want. If you want it on the Nasdaq, you have to go with fast-tracked index insertion. And so that, you know, it's, I mean obviously that's good for everyone who already owns SpaceX stock, but if you are a person who owns index funds, and it's worth noting it's not even just index funds because there's an awful lot of, you know, fund managers who claim to be active managers, but if you look at their portfolios they look exactly like an index. And so apart from the indexes buying, there will be just a bunch of portfolio managers who say, I can't afford to take the risk of not owning a stock that's 4.5% of the Nasdaq if I'm being judged against the Nasdaq. And so, you know, in all honesty, it's a very smart way of maximizing demand for the stock right on the point of it going public. You know, it's questionably ethical from the perspective of the people at Nasdaq to sort of change all of their rules, you know, right around what is by far the, I believe it's the biggest IPO in history because before that we had Saudi Aramco where they did, I think they did a $29 billion IPO. They're talking about $75 billion for this, you know, the public float. So...
Yeah, I mean, a lot of the ethical questions do land on the Nasdaq here, and I'm reminded of when the Nasdaq decided to include MicroStrategy in the index, and as soon as I saw that I was like, 'Oh, now it's really a problem.' It used to be that this was just a guy who had this Bitcoin treasury company and it was kind of a bunch of BS, but if you bought it, you bought it and that's okay. But as soon as we systematized it, suddenly you're putting it into people's hands who don't even know what it is or what they're actually buying. And I guess the question that I would ask is like, why is the Nasdaq incentivized to do this exactly? Why are they changing their rules? Why are they so desperate to include this company in the index?
Well, it's a huge, it's going to be a huge company, especially if it goes public at what, $1.75 to $2 trillion. It will be, I think there's only five US companies bigger than that right now. You're talking about like Google, Microsoft, Nvidia, like, you know, they will be listing a big company. There's all sorts of exchange fees, trading fees, whatever that they earn off of this. It would not be, they would be unhappy if it ended up on the NYSE, for example.
Just looking at the business itself, what do you make of SpaceX as a business? I mean, clearly you believe and many believe that the valuation is a little bit nuts. It would be more valuable than Tesla. What do you make of this business? What do you make of the valuation?
The real question is, there's an awful lot of stuff in there that you would consider sort of lottery tickets, right? Like where it's stuff that seems a little bit unlikely, this whole data centers in space thing. It's been tried, there's a company, I can't think of their name now, but they launched one Nvidia chip into space in a little satellite to run an AI program where I think it was meant to, you know, learn the works of Shakespeare or something like that. It constantly had to be shut down because it overheats because it's very difficult. You know, everyone says, 'Well, space is cold.' But it's also a vacuum and you need air blowing over something or water or whatever to cool it via convection. If it has to cool radiatively, you need these massive, massive cooling fins on it. And so the next version of this tiny, you know, Shakespeare satellite is going to have the second largest cooling array in space behind the International Space Station, right? Like so we're talking about, you know, a very difficult thing to cool, like an actual data center, the type of thing they build on Earth. I mean, you're talking about cooling fins that are miles and miles square. Like I mean, it would be the largest man-made object in space by a long, long, long shot. So in terms of like, could this ever work? It could. Like I mean, you know, it doesn't violate the laws of physics, but it might be very difficult to manufacture and to get up there in a timely manner. You know, there's also this kind of insane expectations around the real profit center, like 66% of the profits, at least as far as we know, of SpaceX come from Starlink, you know, the satellite internet company, and they have at the moment around 10 million paying customers, I believe. You know, there's some analysts out there and they said that they would reach 1.2 billion customers. Now, that's quite an amazing number when you look at the population of the planet, who, like, there's 1 billion people on the planet who earn $35 a day, which comes to a bit under $12,000 a year. They will not be paying for, you know, $150 a month internet access, right? Like the question is how big can Starlink get? And it's reasonable to think that maybe it's close to its capacity. And then when you even look at SpaceX's launch, they are the biggest launch provider in the world, like they take the most stuff into space, but I think around two-thirds of what they bring into space, if not more, is Starlink satellites. Like it's their own stuff they're putting up there. So in terms of like how big the market is for other companies that want to put stuff in space, it's not obvious that it's a whole lot bigger than what's being launched right now.
Patrick Boyle, professor at King's College London, former hedge fund manager, host of a popular finance YouTube channel. Patrick, we're going to have to continue this discussion another time because there's so much to get into here. And it is going to be such an important event that people need to wrap their heads around and actually understand the details. And a lot of those details that you bring up are massively important. So, thank you very much for joining us.
Thank you for having me on. It's been a pleasure.
We'll be right back.
We're back with Prof G Markets. Emerging market stocks are on a tear right now. The MSCI Emerging Markets Index hit a new all-time high yesterday, surpassing its February peak. The index is up about 16% this year. That's roughly three times the gains of the S&P 500. South Korea and Taiwan are leading the move, driven by AI chip demand. This latest rally came on a report that Iran offered to reopen the strait in exchange for the US lifting its blockade of Iranian ports. However, the oil markets remain on edge, with Brent crude still trading at around $110 a barrel. So, here to help us unpack what we're seeing in emerging markets right now, we are speaking with Sid Jain, deputy portfolio manager at GQG Partners. Sid, thank you for joining us on the show. Before we get into what's happening here, could you just remind us what emerging markets actually are? What is this category? What does it entail?
Absolutely. So emerging markets is a broad term, generally includes countries that are less developed, earlier on in their financialization, but frankly from a markets perspective, a lot of countries that fall under that aren't what you would consider emerging. So for example, Taiwan, South Korea, this is generally highly developed, high-income countries, but because of their legacy, they still get included under the emerging markets from a markets perspective. I always think that we should create a new name for them. I just feel like emerging markets doesn't really do it justice. Either way, those markets are up 16% year to date. They sold off when the Iran war started, but they've now recovered all of it. And that's more than three times higher than the S&P's gain so far this year. So, they are massively outperforming US markets at the moment.
And I guess the question is, why is that happening?
