The Zhitong Finance App learned that hedge fund manager David Einhorn, who successfully shorted Lehman Brothers before the 2008 financial crisis and became famous, warned in a quarterly letter to investors that the space exploration technology company SpaceX (SPCX.US)'s sensational initial public offering (IPO) may be remembered by the market in the future as a warning sign that the stock market is approaching a speculative peak.
According to the letter obtained, Einhorn's Greenlight Capital (Greenlight Capital) harshly criticized SpaceX's valuation of up to 1.75 trillion US dollars after the June IPO, believing that investor enthusiasm has seriously deviated from traditional measurement standards of value.
Einhorn wrote in the letter: “As for the $1.75 trillion valuation at the time of the IPO, we don't know if it should be described as a large-scale interpretation of the 'memeization' of the market, the latest irrefutable proof of market 'failure', amazing manipulation of the IPO process, or yet another humiliation of value investing.”
This statement comes at a time when SpaceX completed the largest IPO in history. After listing, it attracted massive investor demand and quickly became one of the most watched individual stocks in the market.
Einhorn isn't the first well-known market watcher to express concerns about SpaceX's giant IPO. On the eve of the June launch, many analysts and investors have pointed out that its valuation level and fanatical subscription demand reflect that the stock market is becoming more speculative, once again triggering analogies with past periods of overheated markets.
The founder of Green Light Capital acknowledged that early private equity investors had already made huge profits, and that his fund became famous for successfully identifying its accounting and valuation issues before Lehman Brothers went bankrupt. He wrote, “First of all, congratulations to the many investors who participated in the private equity round. Now they have huge book returns.” It also added that how to redeem these benefits is actually a “happy problem.”
The billionaire investor said the exchange with SpaceX shareholders further strengthened his valuation concerns. He described that he had a conversation with a well-known investor who predicted that the company would eventually achieve high profit margin of 1 trillion US dollars in annual revenue.
Einhorn wrote, “When we indicated that $1 trillion would exceed the annual revenue of either Amazon or Walmart and asked them to provide evidence, the other party did not give any explanation; instead, they criticized the short sellers.” He added in a footnote that the investor appears to be repeating SpaceX founder Elon Musk's predictions.
Greenlight Capital also questioned the investment-grade credit ratings SpaceX received, saying that such ratings are unusually generous for a company that expects negative free cash flow over the next few years. According to Einhorn, Moody's believes SpaceX has the ability to become one of the largest non-financial investment-grade borrowers, even with these negative predictions. The agency said they were unable to find a precedent for a second company that lacked a history of positive free cash flow and was expected to have negative cash flow for many years and still achieve an investment-grade rating.
Einhorn said that Green Light Capital is uncertain about whether long-term businesses such as space data centers, asteroid mining, Mars travel, or lunar manufacturing will eventually come true, but he believes that even if these opportunities are given probabilistic weighted valuations, it cannot support SpaceX's current market value. However, he did not directly predict the stock's imminent fall, and wrote, “Of course, this doesn't mean that the stock price won't rise. After all, 'doubling the price of a fool is not doubling stupid'.”
He concluded, “Our intuition is that this IPO may be a milestone for us to look back on in the future to mark the top of major speculation.”