To get on board with SpaceX, Wall Street is ready to sell Mag 7 first!

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About 10 days ago, a plane emblazoned with the SpaceX logo flew nearly 200 investors from top Wall Street funds from Newark, New Jersey to southern Texas to attend a multi-day executive roadshow. According to participants, the plane was overcrowded and couldn't accommodate everyone who wanted to board.

The massive IPO of Musk’s rocket and AI company is forcing fund managers to make a series of chain decisions: first determine how much SpaceX stock they want, then estimate how much allocation they can actually get, then use cash or sell holdings to raise funds, and finally rebalance their portfolios after the new shares are included. Once SpaceX is listed, it is expected to rank directly among the world’s top ten companies by market capitalization, with a potential valuation of up to $1.5 trillion.

Notably, after acquiring xAI last year, SpaceX recorded a net loss of $4.9 billion and consumed a significant amount of cash. Its growth mainly depends on the world's most powerful launch vehicle project, which has yet to achieve commercial viability.

What to sell? Mag 7 at the forefront

Multiple investors stated that the most likely candidates for reduction are the "Mag 7"—Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. These seven giants faced pressure earlier this year but rebounded strongly in April; Bloomberg's Mag 7 Total Return Index rose 14% that month and about 2% year-to-date.

Tony Wang, who manages the $1.2 billion T. Rowe Price Technology Fund, frankly stated that his buying and selling decisions regarding the SpaceX IPO “are made in the context of the Mag 7,” with the core consideration being “which offers the greatest risk-adjusted return.” Wang’s largest positions include Apple, Nvidia, and Broadcom, but he declined to reveal specific portfolio adjustments, only saying that other fund managers may reduce holdings in these large-cap, highly liquid stocks.

Another structural factor is the industry concentration limit of funds. Technology stocks currently make up about two-thirds of large-cap growth fund holdings, and the addition of SpaceX will further increase this ratio. Some funds must cut existing tech positions to buy SpaceX. In addition, some fund managers are discussing reducing positions in direct competitors to SpaceX, such as traditional aerospace and defense sectors.

Tax considerations are also at play. Recently declining tech stocks provide ideal targets for “tax-loss harvesting”—Microsoft has dropped about 25% from its peak last October.

Passive vs. Active: Whose stress is greater

The continued trend of funds flowing into passive index funds and out of actively managed funds makes this capital-raising game even more complex. Index funds won’t buy SpaceX until it’s included in an index, while actively managed fund managers facing redemptions are already selling stocks to meet withdrawals—if they also want to participate in the SpaceX IPO, the pressure to sell will only increase.

Goldman Sachs reported last week that, historically, US mutual funds usually raise their cash ratios before major IPOs, but this hasn’t happened this year. However, Goldman also reminds us that major IPOs typically don’t significantly impact large-cap stock performance.

Tesla holders face additional choices. Ross Gerber of Gerber Kawasaki, who manages $4 billion in funds, believes the SpaceX IPO will prompt investors to sell Tesla shares. “Many Tesla investors want to own SpaceX, so they’ll sell some Tesla to buy SpaceX.” Tesla is down 11% this year due to disappointing EV sales. Gerber himself already holds SpaceX shares and plans to sell some of them soon after the IPO; he believes the company’s valuation should be lower than the current $1.25 trillion private estimate.

Strong demand from public market investors may also benefit existing SpaceX shareholders—they may get the chance to sell shares earlier than the typical six-month lock-up period, though the timing and size remain unclear.

Risk warnings and disclaimerThe market carries risks, and investments must be made cautiously. This article does not constitute personal investment advice and does not take into account individual users' specific investment objectives, financial situations, or needs. Users should consider whether any opinions, views, or conclusions in this article are appropriate given their particular circumstances. If you invest based on this information, you do so at your own risk. ```