The SpaceX IPO is getting much buzz on Wall Street, yet its market impact could be more muted than many investors expect. The Elon Musk-founded aerospace company could inject excitement into an inert IPO pipeline and revive tech after its terrible start to the year — given that its debut is expected to be the biggest in history. SpaceX is reportedly seeking an eyewatering $2 trillion valuation and set to go public in June. Normally such a large public offering would spell turbulence for investors as index issuers try to accommodate such a large company. Put another way: If SpaceX went public today at such a high valuation, it would drastically reduce the weightings of tech giants such as Apple and Nvidia in the Nasdaq-100. The Nasdaq-100 and S & P 500 are both market cap-weighted benchmarks, meaning a company’s influence in the index is determined by its market value. An IPO of this magnitude could also lead investors to sell shares in other tech names for capital to trade the new stock on the block. But at least one index provider has already made changes that could make the changes less volatile. Last month, Nasdaq released changes to its methodology for index inclusion that adjust for more companies going public as fully-realized megacaps after staying public for longer. Here are the rule changes, set to go into effect on May 1. Float limiter Only companies with a free float greater than 33.33% will have full market cap representation in the Nasdaq-100, while any company between zero and 33.3% float will be represented in the index based on a sliding scale. In other words, a stock’s position will increase in the index — which is made up of the 100 largest non-financial companies listed on the exchange — as its float increases. Other changes include the inclusion of both public and private shares that will count toward a company’s market capitalization, as well as the pushing of any total shares outstanding updates to the quarterly rebalancing for any company issuing or buying back more than 10% of their shares. There is also a new 10 basis points rule, meaning any company with a weighting less than that in the index for two consecutive months will be removed and replaced at the quarterly rebalancing. To be sure, SpaceX could join the Nasdaq-100 faster based on another rule change. ‘Fast entry’ The provision shortens the timeline by which new companies can be added to the Nasdaq-100 to just 15 trading days from what was previously a monthslong process. Companies that go public, or switch from an eligible exchange, will have to rank within the top 40 of the Nasdaq-100 by full market capitalization to qualify. Those companies will be evaluated seven days after an IPO, after which it would enter the index at the close of the 15th trading day. Critically, it will not replace an existing constituent of the index until the next quarterly rebalancing, meaning the benchmark could be comprised of 101 holdings for a period of time. To be sure, the newly public company would still need a float higher than 33.33% to obtain full index representation. What it means Investors are hopeful the IPO could revive tech after its terrible start to the year. Software stocks, hobbled by fears of AI disruption, have emerged as the severest casualties, with the iShares Expanded Tech-Software ETF (IGV) down more than 30% from its recent high. But the new methodology from the Nasdaq essentially makes the SpaceX IPO less of an event-driven catalyst for traders, at least of that index, given that a lower float representation may not meaningfully infringe on the weightings of the other megacap companies. The rule changes would also tie more updates to quarterly rebalances, making it more likely that any updates are shrugged off by the market. In other words, the Magnificent Seven companies could still face selling pressure but not to the degree that they would’ve without these changes. “There will be funds that have filled up their location of tech. They cannot make space for SpaceX by adding more money, they need to sell somewhere else,” said Giuseppe Sette, co-founder and president of Reflexivity. “But the float of SpaceX may be small enough not to force these people to actually sell too much of these large caps,” Sette said.
