According to Warren Buffett, buying shares during an initial public offering (IPO) is usually a bad idea. But is SpaceX (NASDAQ:SPCX) different?

Most of the time, an IPO is a seller’s market. The situation right now, however, is anything but ordinary… 

Buffett on IPOs

According to Buffett, buying in an IPO is almost always a bad idea for one simple reason. In Buffett’s words:

IPOs are almost always bad investments. There is so much hype involved that IPOs won’t be the most attractive value.

Buffett’s general approach to investing involves being greedy when others are fearful. In other words, buying shares other investors aren’t interested in. 

That’s rarely the case with an IPO. It gives investors the chance to buy shares they haven’t been able to own before. 

This naturally means there’s a lot of interest. And – barring something extremely surprising – this is going to be the case with SpaceX. 

Nonetheless, there is something unusual about the SpaceX IPO. And it might make an exception to Buffett’s general rule.

S&P 500 inclusion

SpaceX is on the fast-track to S&P 500 inclusion. And when it joins the index, there will be guaranteed buying from passive funds that track the index.

This isn’t a long-term strategy. But Buffett hasn’t always been averse to taking advantage of a short-term opportunity when one becomes available.

In 2022, Berkshire Hathaway bought shares in Activision Blizzard. And Buffett stated at the time, this was essentially an arbitrage move. Microsoft was looking to buy the business. But the stock market was doubtful about its ability to get regulatory approval. 

Buffett saw an opportunity and jumped in. So with future buyers waiting in the wings, could there be a similar opportunity with SpaceX?

Is there an opportunity?

I think individual investors need to tread carefully. Index funds will buy, but the situation is more complicated than this. 

Share price movements are about a balance between supply and demand. And passive funds buying will weigh on one side of the equation.

The trouble is, if even more investors want to sell to them, the price will fall. So the strategy comes with a clear risk. 

The idea might be theoretically sound, but it doesn’t work if everyone tries to do it. And that makes me wary about it as a strategy.

Given this, I’m not likely to take part in the SpaceX IPO. The case against doing so looks pretty compelling to me.

Longer-term?

From a long-term perspective, I think there’s a lot to like about SpaceX. It has a dominant market position and a strong competitive advantage.

I’m also pretty bullish on the industry. The idea of building in space looks like a reality to me, not just hype.

As a result, I’ll be keeping a very close eye on the stock. I’m definitely interested, but only at the right price. 

I think of IPOs the way I think of heavyweight boxing. Great fun, but I’m happier watching from a safe distance while getting on with other things.

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Stephen Wright owns shares in Berkshire Hathaway and Microsoft.