Should you invest in the AI mega-cap IPOs?
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SpaceX is set to go public soon, and competing AI labs are expected to follow later this year, giving public market investors the first opportunity to invest in the biggest AI companies in history.
Why it matters: Just because you can doesn't mean you should.
What they're saying: "Nothing ever" would convince Tyler Gardner, former portfolio manager, financial content creator and an upcoming author to buy into these IPOs.
- Doing so would be the "biggest gift you can give to the insiders" and private market participants who were already invested, Gardner added.
- As retail investors get access to these companies and buy in, they will "drive up valuations," creating more runway for institutional investors to sell their shares and take profits, he said.
- That's more likely since this round of AI investors has been locked in these companies for years waiting for them to go public. After what's typically a six-month lockup period, these early investors can sell, which can send stocks tumbling, as was the case with CoreWeave's IPO.
Zoom in: Here are five more reasons finance experts say you shouldn't buy into these IPOs:
- "I worry that they're already priced to perfection," Don Butler, managing director at Thomvest Ventures, tells Axios, meaning that these companies are already overvalued in the private market.
- On average, IPOs underperform the S&P 500 in their first year of trading. Since you take on more risk buying a new company than the benchmark index, you ideally want to get paid more for taking on that risk, not less.
- Speaking of the S&P: The major indexes are already changing their rules to be able to add these AI IPOs in earlier. That means if you wait a beat, you'll likely get exposure to SpaceX anyway in your retirement fund and through your broad market index funds, too.
- Plus: If you own the S&P 500, you're already widely exposed to the AI trade: The top 10 largest stocks, all AI or tech firms, account for nearly 40% of the index on a market-cap basis.
Between the lines: Owning the index is less risky and still gives you exposure to the themes driving these IPOs.
- And soon enough, these names will be added to the indexes, giving you direct exposure anyway.
- For most everyday investors, the standard advice is to steadily invest in a low-cost index fund that tracks the broader market (a strategy known as dollar-cost averaging).
Yes, but: Of course, the biggest companies in history have come from fewer than 5% of the 6,000 IPOs from the last 30 years.
- Picking those winners could be highly profitable.
- It's also very challenging. Just ask the 90% of professional money managers who historically underperform the S&P 500. Stock picking is difficult!
- That's perhaps why half a dozen interviews for this story yielded zero people saying that you should buy into these IPOs.
The bottom line: "You'd be much better off reveling in the fact that Google owns 7% of SpaceX," Adam Johnson, portfolio manager for the Bullseye American Ingenuity Fund, tells Axios.
- Investors can gain exposure to major AI IPOs through the public companies that already hold stakes in those AI firms.
