Why SpaceX stock is crashing around 5% on Thursday

SpaceX shares SPCX fell around 4.94% to $132.60 in early Thursday trading, pushing the stock below its $135 initial public offering price as another large batch of shares became eligible for sale.

The decline comes after SpaceX defied expectations during its first major lockup expiration earlier this month, when more than 900 million shares became eligible for sale, but the stock instead rose sharply.

The immediate downward pressure was accelerated today after DZ Bank initiated coverage of SpaceX with a 'Sell' rating and a $100 price target, warning of a potential 'crash risk' given the massive capital requirements needed to justify its massive valuation.

SpaceX's $86 billion IPO on June 11 attracted strong demand from investors drawn to Elon Musk's plans for the company, which include expanding Starlink satellite internet, developing data centers in space, pursuing artificial intelligence, and pursuing longer-term space technology initiatives.

The stock initially rewarded investors, climbing from its $135 IPO price to more than $225 within days.

Less than two months later, shares fell as low as $105 before recovering to around $145.

The latest move below the IPO price highlights the volatility that can accompany large new listings as early investors gain the ability to sell their holdings.

SpaceX has adopted a staggered lockup structure that allows shareholders to sell their holdings across more than a dozen different dates.

The company's second major unlock took place today, with about 319 million shares held by early investors and employees becoming eligible for trading.

The structure differs from the traditional IPO lockup, in which pre-IPO shareholders are generally prohibited from selling their shares for 180 days after a company goes public.

Lockups are designed to give new public-market investors greater confidence that existing shareholders will not immediately sell large portions of their holdings.

Pre-IPO shareholders can include company executives, venture capital firms, private equity investors, wealthy individuals and employees.

SpaceX's staggered approach is intended to prevent a large volume of shares from reaching the market simultaneously and potentially putting greater pressure on the stock.

More than 700 million shares are expected to become available in September, followed by more than 650 million in October.

By the end of the year, about 4.9 billion SpaceX shares will have become eligible for trading.

Musk's own shares remain locked up until June 2027, according to the current schedule.

The expanding supply has been a major factor in SpaceX's early stock performance.

Investors have been cautious about buying ahead of potential profit-taking by early shareholders, contributing to the stock's decline to around $105 in July, well below its IPO price.

Billions of shares remain locked

Most of the company remains held by pre-IPO shareholders, with Musk owning about 48% of the stock and controlling more than four-fifths of the voting power.

Shares becoming eligible for sale do not necessarily mean shareholders will sell them.

Eligibility to sell does not mean shareholders will immediately sell.

Large insider transactions can attract investor attention and may be interpreted by the market as a signal about an investor's confidence in the company.

Some fund managers that have publicly backed Musk's vision may therefore be less inclined to sell.

Other shareholders could have stronger incentives to take profits. These include funds that owned SpaceX before its IPO but primarily invest in private companies.

For other investors, the decision may depend on the stock's price and the availability of alternative investment opportunities.