IPO Exuberance and Picking Winners

An Initial Public Offering is the first time a privately held company offers shares on a public exchange, typically to raise capital or to provide liquidity for founders, employees, and early investors. From an investment perspective, however, an IPO is primarily a financing event for the company and a liquidity event for existing shareholders—not necessarily a chance for new investors to buy at an attractive valuation. Decades of academic research bear this out: on average, newly public companies have underperformed the broader market by roughly 1% over their first year.¹

Underwriters also have strong incentives for an offering to be viewed as a success. To stimulate demand, shares are often priced modestly below what institutional investors expect to pay, creating the familiar “first-day pop.” While this generates positive headlines, much of that initial appreciation is captured by institutions that receive allocations before most individuals can participate.

SpaceX appears to be no exception. In the first few days on the market, shares surged to more than $200 per share before retreating toward their initial trading price of around $120 today. Meanwhile, the company’s narrative has broadened from space exploration to AI infrastructure, satellite communications, and space-based computing. At its IPO price, SpaceX traded at an extraordinarily high multiple of revenue despite inconsistent profitability. Investors are effectively valuing what the company could become over the next decade rather than what it earns today.

SpaceX’s expanding ambitions point to a deeper lesson. Firms that once had little connection to artificial intelligence now routinely position it at the center of their strategy, a reminder that identifying a revolutionary technology is often far easier than picking the winners that will ultimately profit most from it. Consider the early internet. Numerous web-browsers competed for dominance, including Lynx and Netscape, yet the company that became one of the greatest technology success stories was Google, who was neither the first browser nor an early entrant. More importantly, many of the internet’s largest economic winners were simply businesses that learned to use the technology more effectively than their competitors.

The same dynamic may unfold with artificial intelligence. Today’s AI developers understandably receive most of the attention, but tomorrow’s biggest winners may instead be companies that deploy AI to automate operations, improve customer experiences, reduce costs, or accelerate scientific discovery. Pharmaceutical firms discovering breakthrough drugs, manufacturers optimizing production, and financial firms improving productivity may ultimately generate greater shareholder value than some of the companies building the underlying technology.

Artificial intelligence is a revolution that stands to change society as profoundly as the internet before it. Still, many of that era’s pioneers have come and gone. Whether the anticipated public debuts of leaders like Anthropic and OpenAI ultimately reward long-term shareholders remains, as always, an open question.

Successful investing does not depend on identifying the next headline-grabbing IPO or predicting a revolution’s winners with concentrated bets. History continues to support a disciplined approach built on broad diversification, thoughtful asset allocation, tax efficiency, and long-term ownership of exceptional businesses.