ROI-SpaceX lockup expiry to test retail’s iron stomach: McGeever

The first share lockup expiration for SpaceX's IPO on Thursday may serve as a gauge of retail investors' sentiment on the AI story, following a significant decline in shares since the initial offering.

SpaceX's stock market debut in June was the largest initial ​public offering in history, epitomizing the AI mania that has spread like wildfire across the investment community, especially ​among retail investors. The first share lockup expiration on Thursday could be a temperature check ‌on ​how hot — or cool — retail investors are on the AI story. Was the IPO the high-water mark, or are there more buying waves to come? In the days immediately following the IPO, shares in Elon Musk's rocket, satellite and AI company rose nearly 70% from the $135-per-share offering price, but they then quickly headed south. SpaceX went into Thursday some 50% below that peak ‌and 20% below the June 12 launch price. Shares also tanked 14% on Wednesday following SpaceX’s first earnings report as a publicly traded company. Retail investors comprised a larger-than-usual 20% of IPO shares, meaning they are sitting on huge paper losses, which could turn into realized losses if there is a flood of sales. SpaceX’s rocky ride is symptomatic of wider tech turbulence over the last two months. The S&P 500 software index fell 25% from its June peak, the Philadelphia semiconductor index fell 30% from its high, and the “DRAM” ‌Roundhill Memory exchange-traded fund – which briefly became the most successful ETF in history after its April 2 launch – has plunged as much as 45% in five weeks. These wild swings may themselves be symptomatic of higher retail participation, but they also ‌underscore the rollercoaster ride for many retail investors have been on in the past two months. The worry for SpaceX, tech companies and the market at large is that if this volatility persists, many punters might seek to get off.

DECKS CLEARED? Retail investors pack an increasingly large punch on Wall Street. Their power has been magnified by the rapid growth in ETFs, leverage, and the blend of the two. Leveraged ETFs use futures or swaps to replicate bets with borrowed money, potentially boosting investors' returns by up to five times. The flip side, of course, is that losses are magnified too, as retail investors in South ⁠Korea have found ​to their considerable cost recently.

U.S. assets under management in leveraged ETFs ⁠reached a record $218 billion in June, according to Scott Rubner at Citadel Securities, with activity in technology and semiconductor ETFs exploding at a particularly rapid pace. But heavy liquidation in July slashed that by more than $60 billion, especially in the market’s most crowded themes — leveraged tech ETF assets are down 40%, and ⁠semiconductor chip ETF assets are down nearly 55% over the past month. The retail shakeout in tech and AI stocks has been historic, Rubner says. Two of the three largest days of retail selling in tech ever recorded on Citadel's platform were last week, resulting in the biggest weekly ​liquidation on record. Average selling of semiconductor and memory stocks last week exceeded the previous record by more than five times. This echoes analysis from JPMorgan, which suggests retail investors have significantly reduced their exposure to U.S. stocks via ⁠leveraged margin accounts, which in June had reached the highest level in at least 30 years.

So does this mean we should anticipate less retail participation in tech moving forward, or have these ructions provided attractive buying opportunities? A Morgan Stanley Wealth Management client survey shows that retail - or "self-directed" - investors have come through the recent turbulence ⁠and ​are the most bullish in a year. Their risk tolerance is also the highest in a year, which is perhaps just as well, given that "Big Tech" continues to be their most preferred sector. For more evidence of this, look what happened on Wednesday. Retail investors piled into SpaceX amid its post-earnings sell-off, according to retail broker Vanda. The satellite company was the most bought U.S. stock among retail investors on Vanda's platform, followed by chipmaker Advanced Micro Devices , whose shares also slumped following its ⁠latest results. "(Wednesday's) buying suggests investors continue to view aggressive AI investment as increasing the probability that SpaceX becomes the next long-term winner, rather than a reason to sell," Vanda analysts wrote on Wednesday, adding that retail investors also piled into ⁠other beaten-down AI leaders like Micron Technology, SanDisk and Marvell. The days following ⁠the expiration of the SpaceX lockup may test that thesis.

Retail investors still appear more willing to “buy the dip” than head for the exit. The question is how long that can last. (The opinions expressed here are those of the author, a columnist for Reuters)

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(By Jamie McGeever Editing by Marguerita Choy)