S&P Dow Jones Indices has decided to maintain its rule requiring companies to generate positive net income for the past year, including the most recent quarter, potentially delaying the inclusion of SpaceX and other mega IPOs in the S&P 500 until 2028.
Evercore ISI analysts predict that SpaceX, formally known as Space Exploration Technologies Corp., will not achieve positive net income on an annual basis until 2027. This delay in profitability could postpone its entry into the S&P 500, despite its significant valuation. The Nasdaq 100, however, has adjusted its rules to allow faster inclusion, with SpaceX potentially entering by the end of the month.
Other companies, such as Anthropic PBC and OpenAI, are also considering IPOs and may face similar challenges. Anthropic expects an operating profit of $559 million for the June quarter but anticipates future losses due to increased spending. OpenAI is not expected to be profitable in the near term.
“Eventually these mega-IPOs will be added to the S&P 500, unless their business models fail, so it is a question of timing.”
Jay Ritter, University of Florida emeritus professor
Jay Ritter, an emeritus professor at the University of Florida, emphasized the importance of waiting for stocks to develop a more liquid market before inclusion in major indices. Lawrence Creatura of PRSPCTV Capital LLC noted that running at a loss is a strategic choice for some companies, citing Amazon and Uber as examples.
The S&P 500 aims to reflect the US domestic market, and maintaining the net income requirement is seen as a way to ensure the index's integrity. Howard Silverblatt, a former senior index analyst at S&P Dow Jones, highlighted the importance of a GAAP requirement for the index.
“From a corporate strategy standpoint, it’s not irrational to choose to run at a loss.”
Lawrence Creatura, fund manager at PRSPCTV Capital LLC
Background
The S&P 500 is a benchmark index representing the US domestic market. Its rules, including the profitability requirement, are designed to ensure that only financially stable companies are included, maintaining the index's reputation as a gold standard in global stock markets.
The decision to uphold the profitability rule may cause some market consternation, but it ensures that only financially stable companies are included in the S&P 500. As SpaceX and other companies navigate these requirements, their progress will be closely watched by investors and market analysts.
