SpaceX Stock Just Crashed — Here’s Why

SUMMARY

Ed Elson hosts a discussion with Gil Luria and Arin Dube, examining the recent global tech stock selloff, SpaceX's sharp decline, and the economic implications of minimum wage increases. The episode covers investor anxiety over AI spending, inconsistencies in market valuations, and new research on the effects of raising the minimum wage.

MAIN POINTS

• Major tech indices decline globally, with semiconductor stocks and SpaceX experiencing significant losses. [1:00]
• SpaceX's business shifts toward AI and cloud services, requiring substantial capital investment and triggering volatility. [5:01]
• Market sentiment reflects skepticism about AI returns, with investors favoring chipmakers over big tech companies. [9:01]
• Arin Dube presents research showing that state-level minimum wage increases led to higher wages without reducing employment in key sectors. [13:00]
• Dube advocates for raising and indexing the federal minimum wage to address wage stagnation and affordability issues. [21:00]
• Ed Elson reviews his SpaceX prediction, noting the stock's sharp fall and the potential impact of upcoming lockup expirations and index inclusion. [24:00]

DETAILED ANALYSIS

The episode opens with a review of the recent dramatic decline in SpaceX's stock, which has fallen up to 30% within days and lost $400 billion in market capitalization in a single session, marking one of the largest one-day losses in history. This downturn is part of a broader global tech selloff, with the NASDAQ 100 down approximately 4% for the week and semiconductor companies suffering even steeper drops. The selloff has extended to Asian markets, notably South Korea's KOSPI, which is down 10% from recent highs.

SpaceX's decline is attributed in part to its $25 billion bond offering aimed at financing its AI operations, raising concerns among investors about the company's need for continued capital and the uncertain return on such investments.

Gil Luria, head of technology research at D.A. Davidson, contextualizes the volatility by highlighting the wide range of possible outcomes for AI's impact on economic growth. He notes that while AI could significantly boost GDP, the uncertainty is fueling market swings.

Luria points out that SpaceX's business model has shifted rapidly, with revenue streams moving from Starlink and space exploration to a new focus on AI cloud services. This transition demands heavy investment in data centers, both on Earth and potentially in space, making the company highly capital intensive. The bond offering, combined with recent equity raises, has heightened investor anxiety about whether these expenditures will yield sufficient returns, especially as the company prepares for future events like lockup expirations and possible index inclusion.

The discussion broadens to the tech sector at large, where major firms like Alphabet, Amazon, Meta, and Microsoft have also seen their stock prices fall. The departure of key AI researchers from Google to competitors has raised doubts about Google's position as an AI leader, further unsettling investors. Luria observes that market valuations are inconsistent: while some AI-focused companies are priced for continued explosive growth, established tech giants are trading at relatively low multiples, suggesting skepticism about the sustainability of AI-driven gains.

This divergence presents opportunities for investors who believe in the long-term potential of AI, particularly in established firms like Microsoft and Nvidia.

Macroeconomic factors, including interest rate expectations and geopolitical risks such as developments in Iran, are also influencing market sentiment. Low oil prices and stable inflation have kept rate hike fears in check, but the situation remains fluid and could quickly change, adding another layer of uncertainty to the tech sector's outlook.

The episode transitions to labor market policy with an interview featuring Arin Dube, who has studied the effects of minimum wage increases across U.S. states. Dube's research leverages the natural experiment created by 30 states raising their minimum wages while 20 states remain at the federal minimum of $7.25. His findings indicate that states with higher minimum wages have seen significant wage growth, particularly in the restaurant sector, without corresponding declines in employment.

Dube explains that in markets where employers have some monopsony power, higher minimum wages can reduce vacancies and turnover rather than eliminate jobs. He also notes that while higher minimum wages can lead to modest price increases for certain goods, the overall cost of living is largely unaffected.

Dube advocates for raising and indexing the federal minimum wage to prevent future stagnation and address the ongoing affordability crisis. He argues that the evidence supports such a move and that political will is the primary barrier. The episode concludes with Ed Elson revisiting his prediction about SpaceX, noting that while the stock initially surged post-IPO, it has since dropped sharply.

The real test, he asserts, will come when lockup periods expire and early investors are free to sell, potentially exerting further downward pressure. However, upcoming inclusion in the NASDAQ 100 may provide temporary support as passive funds are required to buy shares.

LINKS

• Prof G Markets YouTube Channel
• Prof G Markets newsletter subscription
• "Notes On Being A Man" book order page
• No Mercy / No Malice newsletter subscription
• Prof G Markets Instagram
• Scott Galloway Instagram
• Ed Elson Instagram
• Ed Elson X (Twitter) profile
• Ed Elson Substack
• ODO business software platform
• LinkedIn Ads promotion page

KEYWORDS