SpaceX, OpenAI and Anthropic: The S&P 500 Inclusion Question and Investment Consequences!

     Over the last few weeks, attention has (rightly) been focused on three potentially trillion dollar companies all lined up to go public, and much of the discussion has been about what SpaceX, Anthropic and OpenAI are worth (and will be priced at). In parallel, there has been a debate about indices and index inclusion criteria, a usually bland topic, but one that has become heated on the questions of whether these new mega-cap additions to the market should be included in the S&P 500. While I remain open to arguments from both sides of this debate, much of it seems to come down on the side that the index should not include these companies, with different reasons offered. 

    I am skeptical, since I see a combination of hidden agendas and misguided views about investing behind each of the three groups that are most vehemently against inclusions. First, you have a cadre of active investors, many of whom have been left bruised by a losing battle that they have waged over the last two decades against passive investments (index funds and ETFs), who view inclusion in the index as a fait accompli, and present this as an added risk to passive investing that can be avoided by paying these professional money managers to avoid that risk. Second, you have investing experts and academics who claim to be looking out for for retail investors and retirees, and view including these big, money-losing companies in indices as dangerous for these small investors, partly because they may not be aware of their exposure and partly because they should not be investing in these types of companies. Third, you have politicians, normally not founts of investment wisdom, speaking out about how including these large companies in government pension funds will reward billionaires, who are the villains in their storylines. In this post, I will try to step back from the heat and try to cast some light on the question of index inclusion, starting with an understanding of how indices are constructed before moving on to the roles they perform in markets and ending with a discussion of whether and how inclusion of these companies will affect the passive versus active investing debate.

Index Construction - Inclusion, Weights and Returns

    Indices have been around almost as long as assets have been bought and sold in markets, but it is undeniable that the extraordinary growth of financial markets in the last few decades, across geographies and asset classes, has added rocket fuel both to the number of indices in existence as well as their visibility. But what is it that sets one index apart from another, and why do indices that purport to measure the same market sometimes move in different ways? To understand the answer to these questions, we need to deconstruct indices and see how they are put together:

• Constituents: The first and perhaps most critical determinant of an index are its constituents, and what determines their inclusion. Take, for instance, the S&P 500, which Standard & Poor's (its creator) describes as the "gauge of large-cap US equities", and is without doubt the most widely tracked and followed index in global markets.  As its name indicates, this index has five hundred of the largest market-cap companies listed and traded in the United States, with caveats on inclusion relating to listing age (listed at least a year), liquidity (measured by looking at shares that are available for investors to trade in the market, i.e., free float) and profitability (positive profits in the four quarters leading into the listing). There are local indices that exchanges (NYSE, NASDAQ), equity markets in other geographies (the Bovespa for Brazilian stocks and the Sensex for Indian stocks) and individual sectors or industries. Across asset classes, there are indices for fixed income, as well as for real estate, fine art and crypto currencies.
• Weights:  You can have two indices that contain the same companies that register very different results over time, depending on how these companies are weighted, with three common choices. The first is to weight every company in an index equally, with the benefit being simplicity, but the cost being that to the extent that companies in an index have very different sizes, the performance on an equally weighted index will not capture aggregate market performance, because it will be skewed towards smaller companies. The second, and one used by some older indices like the Dow 30, is price-weighting, where the companies with the highest price per share are weighted more than companies that have lower priced shares. I cannot think of a single redeeming quality to price weighting, since it measures very little of consequence, and suffers from breakdowns, right after stock splits. The third and most widely used mechanism for construction indices is market capitalization, with tweaks sometimes added on for float (traded shares). The S&P 500, as I noted earlier, uses market capitalization, based on free float, to weight companies and as a consequence, Meta punches in below its true weight, since the bulk of class B shares (which are voting shares held by Zuckerberg) are not counted, as does Walmart, where some family-controlled holdings are treated as non-traded.
• Index level mechanics: Once constructed, an index has to be measured, and to the extent that these indices are designed to capture market prices, the first step is creating a mechanism for converting market prices on the constituents to an index level. Consider, for instance, the S&P 500 which ended trading on June 15, 2026, at 7554.29, and relating that number to the market capitalization of the companies that make up the index. At close of trading on June 15, 2026, the cumulative float-adjusted market capitalization of the 500 companies in the index was $63,498.44 billion and the index units for the conversion can be computed as follows:

Index units = Index level / Float-adjusted market capitalization = 7554.29/ 63498.44 = 0.1190 

Note that there is no intuitive significance to the index units standing alone, but its movements over time can be an indicator of changes happening at companies, because of issuances and stock buybacks, as well as changes in index constituents. If asked to compute earnings or dividends on the S&P 500, these index units come into play again, when converting the aggregated dividends and earnings across all of the S&P 500 companies into index dividends and earnings. In 2025, for instance, the aggregated dollar dividends on the S&P 500 was $664.90 billion, and multiplying that value by the index units (0.1190) yields an index dividend of 79.12 for the year.    

• Price updating: While index levels are starting points, most investors track indices for changes in the index, with increasing stock prices translating into higher index values. Indices that track publicly traded stocks, like the S&P 500 and the Dow 30, should adjust instantaneously as the prices of their constituent companies change during the course of a trading day, making the index a real-time measure of market movements. Indices that capture only price changes miss the other component of returns on a stock, which is dividends, and constructing an index that incorporates dividends paid on a continuous basis does take work and requires assumptions about whether the dividends are reinvested in the index or extracted by investors. Though not as widely disseminated as the pure-price version, there is a  variant of the S&P 500 that computes the total return on the index, with dividends included. Indices of assets that are not continuously traded, most notably real estate (like the S&P Case-Shiller home price index), try to overcome the absence of price data on the assets by extrapolating from the pricing of the subset of assets that get traded, leading to noisier estimates for index value and lags in price adjustment.
• Index changes (inclusions and exclusions): Even the best constructed indices have to confront change and have mechanisms to deal with that change that are transparent and quick to put into practice. Some of that change will come from companies being removed from public markets, either because they are acquired, taken private or because of bankruptcy. Some change will be caused by new companies being listed on the market or some will be created by changes in market cap in companies that bring them into contention for inclusion in the index, either because the market cap has risen (making them large enough to qualify for a large cap index) or has dropped, removing them from large cap status. Since you do not want abrupt changes in the index level coming just from replacing a company with a low market cap with one with a much higher market cap, the adjustment has to come from changing the index units. Thus, assume that a company goes public with a trillion dollar market cap and that it will be replacing a company with a one-billion market cap, the adjusted index units for the S&P 500 will be as follows:

  Index units = Index level / Float-adjusted market capitalization + Market cap of added firm - Market cap of eliminated firm = 7554.29/ (63498.44+ 1000 -1) = 0.1171

  This will then percolate through into the index earnings and dividends estimates, for the index. Note that while the index level will be unchanged by the addition of the trillion dollar company, the other components that it brings with it, including higher growth and perhaps negative earnings, will alter the fundamentals of the index going forward. 

With these index mechanics in mind, it is quite clear that if S&P does include SpaceX, OpenAi and Anthropic in the S&P 500 index, the index will not change at the time of the replacement, but it will change the index fundamentally going forward, bringing in more risk, a near term hit to earnings and perhaps a long term increase in growth.

The Index End Game

    When indices were first created for markets, their primary purpose was to create composite measures of market performance, with a single number (the index value) capturing the performance of a much larger group of assets. Over time, though, the use of indices has expanded, first as proxies to assess the performance of active investors, to see whether they over or underperformed, and then as investment vehicles, with the advent and growth of index funds and ETFs. 

Measurement

    I started in equity markets in 1981, and at that time, indices were primarily measures of market performance. At the time, for most investors without intraday access to markets and without financial news channels, news of market performance, on most days, was a snippet on the evening news, where the anchor would mention the market's change during the day, usually using the Dow 30 as a stand in for the market. Indices continue to perform the measurement role, though our access to data has changed dramatically, with real time updates on our devices occurring all through the day. From the measurement perspective, it is worth looking back at index construction and looking for indices that best capture what you are trying to measure. The reason that the S&P 500 has acquired primacy is that while it includes only 500 companies in a US equity market that has almost 6000 publicly traded companies, the fact that these are the companies with the largest market capitalization means that the index represents more than 80% of the market capitalization of all US equities, and as a result, it is the single best proxy for aggregate equity market performance in the index. That said, a different framing of the measurement question can lead you to a different index choice. Thus, if you are trying to measure how the average US equity did during a period, you may be better served using an equal-weighted equity index for that measurement. 

Performance Evaluation

    Investors who trust professionals to manage their money, and pay them for their services, either as up-front entry fees or in annual management expenses,  are entitled to wonder whether they are receiving a compensatory benefit, in the form of higher returns. It should not be surprising that comparing a mutual fund's returns to the returns on an index becomes a proxy for fund performance, and in the early years of performance evaluation, the S&P 500 became the default comparison index. Used in that context, one of the most jarring numbers in active investing is the percentage of active large cap funds that earn returns that are lower than the S&P 500, each year for the last two decades:

S&P Global

Over the last twenty five years, there have been three years where more than 50% of active funds have beaten the S&P 500 index, and barely so, and the extent of underperformance in the remaining years i staggering. The pushback from some active fund managers is that, given their investment styles, the S&P 500 is not the right index to use to judge them. Value fund managers, who invests in low-risk and high-dividend paying stock will argue that the portfolios they create are less risky than the S&P 500, making their lower returns more of a risk effect than underperformance. Academic studies that used risk and return models to tweak the index returns were quickly dismissed as being wrong, because the models that were used (the CAPM, the APM, Multi-factor models) were flawed. This deadlock was broken by S&P, when it created SPIVA, where the returns earned by fund managers in any class (small cap vs large cap, growth vs value, domestic vs foreign) are compared to returns that investors could have earned by investing in index funds in the same class, and by Morningstar, using a variant of the same approach. Thus, a fund manager who invested in small-cap, high dividend paying stocks would see his or her returns compares to the returns you would have earned on a small-cap, value index fund, making it much more difficult to explain away underperformance. There are many reasons for the slippage in active investing's share of overall investing in the last two decades, but the SPIVA results are devastating and damning for any claim of active investing superiority. Here, for instance, are the results, by investment class, on the percentage of active fund managers who underperfomed index funds in their investment style, over the last decade, at the end of 2025:

There is very little hope in these numbers, as fund managers underperform their respective indices in every single category, and by more, over longer periods. In fact, there is not a single fund group in any style that outperforms its respective index past ten years. For those of you who are reading this other geographies, and believing that it is different in your local markets, either because insiders have privileged access to information or market inefficiencies, SPIVA also tracks fund manager performance outside the United States, and reports similar results:

At this point, there is almost no counter to the argument that active investing collectively creates a drag on portfolio performance, and active investors seeking to defend the profession are left looking through the data entrails, hoping for niches where "alphas" exist. Thus, two decades ago, the notion that private equity investors and hedge funds were smarter than the market and could beat the market fueled a push of retirement and endowment money into these vehicles, but as they have become larger, they have come to resemble mutual funds, in terms of performance. 

Investing Vehicles

    There is a third use of indices that, in my view, has overwhelmed the measurement and performance evaluation roles that they play, and it is that they have become vehicles for investing in the form of index funds and exchange-traded funds (ETFs). That possibility was already existent in 1981, but at that time, the only index with an index fund available to most investors was the S&P 500. Today, you can not only invest in index funds across geographies, sectors or sub-groups based on fundamentals (including volatility, size and earnings), but the exchange traded fund explosion has given you an alternate route, with slightly higher costs (than index funds) and more liquidity. 

Vanguard, a pioneer when it listed the S&P 500 index fund in 1976, now lists more than a hundred ETFs and more than two hundred index funds, allowing investors to not only invest in almost any market, but also in the subsets (sectors, small companies etc.) that they chose to. The size of the index fund business and the fees its creates for the index creators has created some tensions in the process, and faced with a choice between a poorly constructed index that index fund investors would love to trade on and a better constructed one that investors find less attractive, it is possible and perhaps even likely that the fund creators will pick the former.

Indexing and Passive Investing - Unintended Consequences

    There are two forces that the last section highlight that have played out in altering financial markets structurally and dramatically in the last two decades. The first is that the underperformance of active investing has become easier to document and more visible for everyone to see. The second is that investors who see this underperformance have more passive investing vehicles in the form of index funds and ETFs accessible to them, and can move their money into them. As a consequence, in the battle between active and passive investing for investor dollars, the fight is getting so one-sided that, if you were a referee, you would invoke the mercy rule and try to stop it:

It is undeniable that the rise of passive investing vehicles has empowered investors, who have gained in terms of choice and costs, but it has also created an existential crisis for active investors, and especially so for those who make a living out of managing other people's money. While some active investors hold on to hope - that they are better than the rest, that this is a cycle that will reverse, that some new technology (big data, AI) will save them- there are others who have taken a different tack. Mostly conceding that index funds and ETFs have outperformed fund managers, they have taken to arguing that the rise of passive investing is creating costs and effects that outweigh its benefits, and that action is needed urgently, though it is unclear from whom. In this section, I will highlight three of those effects.

1. The Index Inclusion Boost

    The addition of a company to a well known or widely followed index (the S&P 500, Dow 30, MSCI Global) yields pluses, increasing its visibility to investors and potentially making it more investable, as well as increasing trading volume on the stock and making it more liquid. The question of how those benefits get priced in when a stock gets added to an index (and the costs of being removed from an index) have been studied over time, with a focus on additions to (and removals from) the S&P 500. As passive investing has grown, with more choices in index funds, it remains true that a significant percentage of passive investors hold S&P 500 index funds, and that, in the eyes of some, this should make inclusion in the S&P 500 index an even greater positive today than in decades past. 

    Looking across these studies, there seems to be a consensus that there is a bump up  in the stock price from a company being added to the S&P 500, and bump down, when a company is deleted from the index, but disagreements both about the magnitude of the bump and whether it is permanent and transitory. The general sense that you get from studies is that  bump in stock prices from being included in the index has become smaller and more transitory over time, and in the last decade or two decades, it has largely disappeared. To back this up, I look at one of the most complete studies that I have seen of the index inclusion question, where S&P took a look at the 715 companies added and 711 company deletions made to the S&P 500 between January 1995 and June 2021, and examine the excess returns in the days around the change:

Link to study

As you can see, the positiv eprice effects of being added to the S&P 500 index have depleted over time, as have the negative price effects of being removed from the index. Note that this finding cuts against the argument that as passive investing has increased in the last two decades, the allure of being in the S&P 500 should also have gone up. Instead, as the value of funds indexed to the S&P 500 has surged over the last two decades, the effect of being added to or taken out of the index has become smaller, not larger, and there is evidence accumulating that companies that get added to the S&P 500 are more likely to underperform than outperform in the twelve months after the addition.

    As the debate about whether SpaceX, OpenAI and Anthropic should be included in the S&P 500 index heats up, I would suggest that the evidence of a small and dissipating price effect of inclusion has to become part of the discussion. I am sure that there will be some who will disagree with me, but I don't think the price trajectories of any of these firms will be altered by whether they are included in or excluded from the S&P 500. For those who disagree with me, and believe that being added to index is bullish for investors in these companies, I would recommend that you look at the chart from this study which took a look at Tesla's stock price behavior before, during and after its replacement of Apartment Investment and Management (AIV) in the S&P 500 on December 18, 2020. 

Tesla not only under performed the S&P 500 in the months after its inclusion in the index, but massively underperformed the company (AIV) that it replaced in the index.

2. Momentum versus Fundamentals

    As the funds invested in index funds and ETFs has surged, the argument that some are making is that being added to an index gives you a boost, largely because of index fund flows to companies in that index, and more of a boost if you are a large cap company. Since the money flows from other stocks, this line of thought also suggests that fundamentals will receive less attention and disconnect more from prices, especially because there are fewer active investors doing research and looking for market inefficiencies. In addition, they note that since indices are mostly market cap weighted, this momentum benefits larger market cap companies, in effect allowing them to become larger. As evidence in favor of this argument, they point to the fact that markets have become top heavy, where a few winners are carrying the entire market, that the small cap premium, an enduring feature of equity markets in the twentieth century, has largely disappeared in this one and the dominance of momentum in investing success in the last decade.  I concede that these phenomena are consistent with the "passive investing feeds momentum" story, but I am skeptical that passive investing is the cause for the following reasons:

1. Momentum can cut in both directions: It is true that funds flowing into index funds flow into the companies in that index, with more flowing into large cap companies, but it is also true that funds can flow out of index funds, and when that happens, the momentum can cut in the other direction. In fact, the conclusion is that inclusion in a widely-tracked index (like the S&P 500) will increase intraday and short term volatility, but not price levels. In fact, the fading price bump from being added to the S&P 500 that we noted in the last section is an indication that the market does not buy into the momentum story.
2. Winner-take-all economics: If momentum is the reason for the big companies winning, there should be divergence between small and big companies on how fundamentals get priced. Put simply, you should see the pricing metrics (PE ratios, EV to EBITDA) for large cap companies increasing relative to small cap companies, as passive investing surges. Looking back at the fading small cap effect and top-heavy markets of the last decade or two, I would note that not all large cap companies have been winners, and the winning large cap companies have delivered a disproportionate portion of increased earnings. In the context of the Mag Seven, I have talked about how technology and disruption has changed more industries into winner-take-all businesses, with a few companies dominating these businesses, and why that phenomenon will play out in markets as well.
3. Active investing and equity research: In my view, the notion that most analysts and active investors are looking for market inefficiencies and seeking out information strikes me as misplaced. Much of active investing is built around publicly available information and a belief in the power of mean reversion, not original research and seeking information. It is true that there is a subset of active investors and equity research analysts who contribute to making prices more informative, but that subset is a small one, and one that is better equipped to survive the passive investing shift.

Doomsday stories about how passive investing is making markets less efficient and less inclined to reflect fundamentals strike me as overwrought, and while active investing will continue to lose market share, and deservedly so, it will not disappear. Since these stories are often being told by fund managers who not so long ago spoke contemptuously about efficient markets as an academic fever dream, they also strike me as both hypocritical and self-serving. 

    Even if you accept the argument that passive investing is making markets less efficient and more momentum-driven is true, I am unsure about the implications for investing. Asking individual investors, retirees and endowment funds to  pay fees to professionals to manage their money while underperforming indices, in service to the larger cause of market efficiency is tone deaf and a non-starter. In fact, any endowment or pension fund manager who uses this argument to steer endowment funds to active money managers would be in violation of his or her fiduciary responsibility. Perhaps, the argument is being made to regulators to restrict index funds (on which indices they can index, how much money they can manage), I can see why active money managers may be in favor, because I understand that they are trying to protect their livelihood, but they should dispense with any talk about protecting individual investors or making markets more efficient.

3. Hidden risks

    An undercurrent in some of the opinion pieces that I have read about why SpaceX should not be included in the S&P 500, written by investment experts and academics, is that it will expose retail investors and retirees to risks that they are unaware they are taking, or even if made aware of the fact, should not be taking in the first place. In particular, these opinion-writers seem to be arguing that the risks associated with investing in a big, money-losing companies (like SpaceX, and presumably OpenAI and Anthropic, when they go public) are so large that individual investors and retirees would not invest in these companies, and even they would, they should not be allowed to do so. I find this chain of reasoning to be both misguided and condescending, and reflective of misconceptions that are deeply and widely held in the investment expert class:

1. Risk and Diversification: Is it true that individual investors, if made aware of the companies that they owned in index funds, would blanch at the risks that they have exposed to in individual holdings? Investing just in a portfolio of a few companies like SpaceX would be imprudent, but an investor in a S&P 500 index fund is far less exposed to underperforming the market than the typical active money manager who either over invests in SpaceX (if it goes down) or chooses not to invest in it (if it goes up). 
2. Smart and Stupid Money: While the investment experts and academics who push to protect retail investors and retirees from their own mistakes will never put into words this belief, implicit in this push is the view that these small investors are uninformed and naive, and will be exploited by smart money (institutional investors and hedge funds). The notion that the smart money will know whether SpaceX (and companies like it) is overvalued or under valued, and is positioned to time investments better is fanciful, since institutional investors are more traders than investors, making them market followers, not leader.  
3. Good businesses and good investments: The weakest link in the argument against putting your money in money-losing companies is the implicit belief that money-making companies are good (safe) investments and that money-losing companies are bad (risky) ones. I will wager than an investor who was constrained to invest only in money-making businesses in the last two decades would have under performed an investor operating without those constraints, even after adjusting for risk. At the right price, a money-losing company can be a good investment and at the wrong price, a company with solid and stable profits can be a bad investment. 

I am generally skeptical of attempts to protect individual or retail investors from their own mistakes and decisions, since more damage has been done to this group by those claiming try to help and protect them over time than by those who are out to exploit them.

Conclusion

    In the week prior to the SpaceX IPO, S&P removed some of the suspense in the question of whether the company would be included in the index by announcing that they would stick with their requirement that a company be listed and traded at least a year before becoming eligible for index inclusion. That decision also means that OpenAI and Anthropic, if they do go public this year, will also have to wait a year for consideration. I am glad that S&P is not changing the rules to allow these companies to jump the queue to get into the index, but I hope that it is not framed as a decision that was taken to protect investors or in the hope that these companies would become magically money making, better governed and with working business models. The truth is that a year after they list and start trading, these three companies will still be money losing businesses, with business models that are still works in progress and will remain corporate governance horror stories.  S&P needs the time to manage the transition of three trillion-dollar companies into the index, even as it confronts the challenge of claiming to be a large cap index that does not include three of the largest market cap stocks in the market. As for the companies (SpaceX, OpenAI and Anthropic), I will wager that they will lose little in market momentum from not being included in the index, and that their price paths will be determined by how the AI story continues to play out in terms of both substance (growth, unit economics, reinvestment) and perception (hype and momentum). The bottom line is that S&P needs these companies in its index more than they need to be in the index, with the consequence that the companies will not go out of their way to meet index requirements that they feel are costly to them, and that if there is any bending, it will be S&P that does it.

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Revisiting the SpaceX Valuation: A Post-Prospectus Update!

     A few weeks ago, I assessed the value of SpaceX ahead of its initial public offering, with the admission that I was making my estimates with drabs of data, some of it coming from unofficial sources. I also promised to revisit my valuation, when the prospectus came out, and now that it has, I will examine how the information it contains has changed my view of the company and its valuation. I will also use this post to talk about the information gained by having access to a company's financials, and why the information you glean from those financials is different at younger companies, with growth potential, relative to mature companies.

The Prospectus: Data versus Information

    The requirement that companies that plan to go public in the United States have to register with the Securities Exchange Commission (SEC) and file a prospectus has been in place for decades, but the contents have changed over time, with disclosures added on partly by regulation and partly in response to investor demands. In a paper focusing on IPO disclosures from a couple of years ago, I noted that prospectuses have become more bloated over time, often running four to five times longer than those filed by companies that went public three or four decades ago, but not necessarily more informative. The SpaceX prospectus that we made public on May 20, 2026, is 277 pages long, with an addendum that runs another 100 pages, with dozens of pictures (mostly of spaceships going into orbit), a soaring story, but with weak links and multiple distractions. To get a measure of how the prospectus changes my pre-prospectus story and valuation, I will start with the easy part of the update, where I use the numbers from the financial statements in the prospectus to replace my pre-prospectus estimates, on operating metrics like revenues and earnings as well as on share count and IPO proceeds. I will then move on to the weightier part of the analysis, where I assess how the information in the prospectus has changed my story line and value for the company. 

The Prospectus: Data update

    In my pre-prospectus valuation, where I assessed the value of SpaceX at roughly $1.2 trillion, I relied on scraps of information, including leaked stories of estimated revenues ($15.5 billion) and EBITDA of $8 billion, since I did not have access to the company's full financial statements. With the release of the prospectus, that shortcoming has been remedied, and I started by updating the operating metrics that drive the intrinsic value of the company:

SpaceX prospectus

As you can see, my estimates for revenues for the launch and connectivity (Starlink) businesses were close to the actual numbers, but my xAI revenue estimates were much lower than reported. Overall, I had estimated an operating loss of $2 billion in 2025, and the prospectus yielded a larger loss of $2.57 billion. With almost $2 billion in interest expenses, unavailable prior to the prospectus, incorporated, the company reported a net loss of about $5 billion. A big factor in the operating losses reported by the company were its ballooning R&D expenses, and in keeping with my argument that these expenses should be capitalized, I estimated an earnings before interest, taxes and R&D of $4 billion.

    On the financing front, the prospectus filled in details on cash and debt that were unavailable prior to the prospectus being made public:

SpaceX prospectus

My pre-prospectus estimate of book value of equity was a shot in the dark, at $20 billion, but the acquisition of xAI caused that number to jump to $41.3 billion, as did the total debt (inclusive of leases) to $22.9 billion. The former (book value of equity) played little role in my valuation, but ignoring debt of this magnitude may seem monumental, there are two offsetting factors that reduce the impact on my value estimate. The first is that I also ignored the presence of cash, and with $24.7 billion in cash, the company's net debt is −$1.9 billion (cash exceeds debt), making the impact on value minimal. The second is that with my estimate enterprise value of $1.21 trillion, the debt, even if considered in full, is small enough to represent rounding error.

    The prospectus did contain information on share count and structure, as well as on the company's plans for the proceeds, and both were useful at the margin, with the former affecting my estimated value per share and the latter determining the treatment of the cash that will be raised from the offering:

• Share count: In my initial valuation, I used the private company pricing per share in conjunction with estimated market cap to back out a share count of 2467 million shares. With the prospectus, we get a clearer sense of shares outstanding, with a basic share count of 12,535 million shares reported in the prospectus (pages 246 & 247) in computing per share numbers. That share count does not include the new shares that will be issued in the offering, but that share count will be determined by the magnitude of the offering as well as the expected issuance price, and while the total share count includes options, warrants and rights that are exercisable before June 30, it does not include restricted stock units held by employees (see prospectus, page 18) and that information is still blanked out in the prospectus. 
• Use of proceeds: It is estimated that SpaceX plans to raise $75 billion from the offering, and the prospectus specifies that the company plans to hold the proceeds to cover infrastructure investments in these businesses (see prospectus, page 66). That implies that any money raised in the offering will add to the company's cash balance, right after the offering, and will augment firm value (but not enterprise value). 

The prospectus also lays bare the governance questions that will overhang the firm, with information that there will be two classes of shares- 6,932 million class A shares with one vote per share and 5,602 million class B shares with ten votes per share. The public offering will be class A shares, and with Elon Musk holding all of the class B shares, he will control more than 85% of the voting rights in the company. In summary, the prospectus is long and filled with distractions, but there is almost nothing in it that surprises me. SpaceX is a growing company that is money-losing and cash-burning, that will be a Elon Musk vehicle (with all the pluses and minuses that entails). 

The Prospectus: Story update

    In my original post, I noted that SpaceX is a company, where it is the story about how its businesses will evolve over time that drives value, rather than the base year numbers (on revenues, earnings and cash flows). That story, broadly speaking, has three key spokes to it and they are summarized below:

The first of these spokes, target revenues, frame how big each business can grow over time, and is a function of the total market and market share. The second, the target operating margin, will capture how profitable each business can become, and is determined by unit economics and economies of scale. The third, reinvestment, measures how much each business has to invest to get to target revenues, and will vary with the capital intensity of the business. To frame how my valuation will change, as a result of what I learned from looking at the prospectus, I will start by presenting by pre-prospectus estimates on these key inputs, and then look at the impact of the prospectus on each input.

Pre-prospectus inputs and value

    My pre-prospectus valuation of SpaceX contains my storyline for the three businesses that the company is in, with an add-on for the expansion options embedded in each business:

With these inputs in place, I estimated a value of $1.2 trillion the SpaceX enterprise, and since I ignored cash and debt, this yielded an equivalent market value. Driving these numbers are upbeat stories about each of the three businesses that SpaceX is in, with large revenues and high margins in stable growth.

The Prospectus Effect

    To the extent that the prospectus contains information that alters the storylines on any or all of these businesses, it will affect my estimate of value for SpaceX.

1. Revenue Growth (Target Revenues)

    I will start with the growth (target revenues) input and use two parts of the prospectus to reexamine my story. The first is the historical growth reported by the company for each of its three business lines - launch, connectivity and AI.

As you can see, the company saw its revenues grow by a third in 2025, relative to 2024, with divergence across businesses; the connectivity business led with revenues growing by almost 50%, the AI business saw an increase in revenues of about 22% but the space business reported only modest growth in the year (7.64%). In short, notwithstanding the star role played by AI and the appeal of the rockets in the space launch business, it is Starlink that carried the company in 2025. The prospectus mentions Colossus, xAI's compute center, which has been leased to Anthropic for an eye-popping $1.25 billion a month, which should kickstart revenues next year, with the potential of tension in future years if xAI plans to go head-to-head against Anthropic in the AI products market.

    The other relevant section of the prospectus contained estimates of total addressable market (TAM) for the company, broken down by business:

If the prospectus is to be believed, SpaceX has the largest TAM of any company in history, with a total TAM of $28 trillion, and AI accounts for $26 trillion of that market estimate. This estimate borders on fantasy, but I will cut the bankers who came up with these numbers some slack for two reasons. First, the estimation of TAM has been gamified by Silicon Valley, with bloated and patently unreachable numbers floated for companies, as I noted when I valued Uber (which was given a TAM of $5.7 trillion in its prospectus) for its IPO in 2019 and Airbnb (with a TAM of $3.4 trillion in its prospectus) in 2020.  Second, it is true that AI agents are usable across almost every business and geography, giving it much wider reach than most products and services, and while the details of how the TAM was estimated are not specified in the prospectus, my guess is that the $26 trillion estimate includes all or most of the operating expenses of all businesses. 

Story takeaway: I will stick with my estimates for target markets for the space launch and connectivity businesses, since the TAMs in the prospectus are, in my view, over reaches, and I will slow growth in the near years, to reflect that these businesses will take time to mature. In the AI business, I disagree with the magnitude of the TAM in the prospectus, but the acquisition of Cursor and the indications in the prospectus suggest that xAI very much wants to be part of the enterprise solutions space, notwithstanding its immense capitalization needs, and I will double my target revenues for AI from $80 billion to $160 billion, reflecting my estimate of a TAM of about $3 trillion to $4 trillion for AI products and services from businesses.

2. Profitability

     On the profitability front, the first part of the prospectus that I looked at was its breakdown of income statements, by business:

With the caveat that we have only two years of detailed information, there are interesting findings that emerge from the historical data on each of the businesses. 

• The space business has the best unit economics of the three business, with a gross margin of about 67%, reflecting the cost advantages of its reusable rocket technology. While the space business reported an operating loss, that was entirely because of its weighty R&D expenses, and capitalizing those expenses results in a healthy operating margin for the business.
• The connectivity business does not have gross margins as high as the space business, but those gross margins are improving, with gross margins jumping from 37% in 2024 to 48% in 2025. This business had positive operating income in 2025, even before capitalizing R&D, and improves substantially with capitalization. 
• The AI business not only has the lowest gross margins of the three businesses, but saw deterioration of those margins in 2025, reflecting intense competition from other LLMs as well as the rising costs of delivering AI products and services.

There are other parts of the prospectus that come into play in the profitability discussion, with each of the businesses:

• On the space launch business, the cost of launching payloads at SpaceX have been trending down, making its already large cost advantages in the business even larger. 
• On the connectivity businesses, there is bad news and good news on the per user front. The bad news is that the revenues, per month, per subscriber, declined from $99 in monthly revenues in 2024 to $66 in monthly revenues in the first quarter of 2026. The good news is that the number of subscribers has doubled from 5 million in the first quarter of 2025 to 10.3 million in the first quarter of 2026, with the bonus that the company has been able to improve its profitability (see gross margins in the table above) over time. 
• On the AI business, there is not much to go on, on the profitability front, since the focus in the prospectus is more on the increase in compute capacity (see nameplate compute draw on Page 90 of the prospectus) than it is on revenues, especially on the enterprise front. Here again, though, the Colossus lease with Anthropic should help with profitability in the near term.

Story takeaway: The unit economics for the space businesses, in conjunction with the recognition that there are no other substantial operating expenses (outside of the misclassified R&D expense) in either business, lead me to increase my estimate of the target margin for the business to 45%, from 40%. I will leave intact the target margin of 60% for the connectivity business, because once the satellites that service this business are in space, this is the business that will benefit the most from scale. My biggest shift is in my estimated target margin is for the AI business, where the dynamics that are pushing gross margins down, i.e., increased competition and high costs of delivering AI services, will persist; my estimated operating margin drops from 45% to 25%.

3.  Reinvestment

    In my post prior to accessing the prospectus, I did describe SpaceX as a capital intensive business, but the actual spending on capital expenditures and R&D in the prospectus is breathtaking in its magnitude:

In 2025, the company spent almost $14 billion in capital expenditures and almost $9 billion in R&D, a doubling of its reinvestment from 2024. In particular, it is AI that is driving the bulk of this surge, accounting for more than $14 billion in total reinvestment in 2025, with $9.1 billion in capital expenditures and $5.1 billion in R&D. The positive twist that a SpaceX optimist would put on these numbers is that the spending on AI in particular is a positive, indicating that the company is not planning to settle on a niche market strategy, but instead will will go head-to-head with Anthropic, Google and OpenAI for the enterprise solutions markets. The negative spin is that this ambitious agenda will translate into tens of billions more in capital expenditures in the near years, creating a drag on the cash flows and value destruction if they lose the AI market competition.

Story takeaway: Given that SpaceX is continuing to invest substantial amounts in its space launch and connectivity businesses, I will increase reinvestment in the near term (years 1-5) by lowering how much they will generate as additional revenues for every additional dollar of capital invested (lower sales to capital ratios). With AI, where I was already assuming that reinvestment would be large (with a low sales to capital ratio), the tripling of target revenues will result in a surge in reinvestment to generate the higher sales.

Updating Story and Value

    While the core story of SpaceX being a company with growth potential and strong competitive advantages that I framed prior to reading the prospectus remains intact, there are changes to that story that come from the information in the prospectus. The prospectus reinforces the notions that the company is best positioned in the connectivity business to generate both revenue growth and profits in the near term, that its cost advantages in the space launch business will persist and deliver profits, but that target market will be slower to develop, and that the AI business has both the largest target market and poses the biggest challenges, in terms of profitability and capital intensity, for SpaceX. 

    Bringing together my changes in target revenues, operating margins and reinvestment inputs allows for an update of the input table that I started this section with:

Clearly, some of the changes in inputs (such as the higher margins for the space launch business and a bigger target market for AI) will push value higher, and some of the inputs (including a slowing of near term growth for all business, and the much lower margin for the AI business) will push in the opposite direction. Since US treasury rates have risen from 4.20% at the time of my earlier valuation to 4.56% at the start of June, I have increased the costs of capital that I use in the valuation accordingly (to 8.37% from 8.02% to start the valuation, and the steady state cost of capital to 8.25% from 8.00%; both numbers would put SpaceX at close to the median for all US companies). With these updated inputs, I reestimate the cash flows and the valuation for SpaceX, with the IPO proceeds (estimated at $75 billion) added to the mix: 

Download spreadsheet

The enterprise value for SpaceX edges up from $1.21 trillion, in my pre-prospectus valuation, to $1.22 trillion with the post-prospectus numbers, and the overall equity value increases to $1.3 trillion, with almost all of the increase coming from the influx of $75 billion in cash from the IPO, albeit with a higher share count. The value per share of about $100 will need some revisiting as the IPO numbers firm up and more information is forthcoming on restricted stock units owned by employees, but just as I was finishing this post, a news story hit the wires that the offering price would be set at $135/share.

   If I were to summarize the impact of the prospectus on my SpaceX story, it would be that it has made the story bigger, but also more volatile. There are a multitude of risks that SpaceX faces in each of its businesses, but the one that I would be concerned about the most is that it will overreach in the AI business, beginning with an overestimate of the target market for AI products and services and the strength of its own competitive position in that market, and following through with investments that reflect those misplaced assessments. Those concerns are heightened  by a voting share structure that locks in Elon Musk's control of the company, since there is little that shareholders can do to restrain the company, if SpaceX doubles down on capital expenditures and acquisitions in the AI space, even after it becomes clear that the AI market is much smaller than anticipated and/or that xAI's offerings are not as good as the competition. If you add to this mix the antipathy that exists between Musk and Sam Altman, you have the potential for a UFC match between two monstrous egos, funded by tens of billions of dollars shareholder money.

Financial Statements and Value: The Life Cycle Effect

    Financial analysis and valuation, going back to Ben Graham's Security Analysis, has always been centered on financial statements, and that focus has become more intense over the last few decades as access to data and analysis tools has expanded. In fact, much of what passes for valuation has become financial modeling, where line items in financial statements are forecast based upon the historical time series, with the proverbial bottom lines being earnings and cash flows. Along the way, ratios computed from financial statement numbers are used to screen companies for investment quality. Some of these ratios, such as accounting returns on capital and equity, have become the basis for assessing company quality and competitive moats in the hands of consultants and investors. The SpaceX prospectus is a case study in why this approach to investing is often myopic and misleading, and why the informational value of financial statements will change as companies grow and mature. 

    In valuing companies, you are always trying to forecast revenues, profits and cash flows in future, but they key questions you want answered and the drivers of value shift as you move through the life cycle:

As you can see, for young companies, the key determinants of value include sizing the total market and assessing unit economics, and not the proverbial bottom lines in accounting statements including the magnitude of revenues and profitability. As companies move through the life cycle from start-up to mature to decline, you should expect to see financial statements evolve as well. Young and high growth companies will generally report small revenues (though they expect those revenues to ramp up over time) and losing money and having negative cash flows is a feature, not a bug. As companies mature, revenues will get larger (albeit with lower growth) and profits turn positive, as will free cash flows available to return to shareholders in dividends and buybacks.

If you allow for the fact that all three of SpaceX's businesses are young, falling in the young to high growth categories, the big questions driving value are about market size and unit economics, since the former provides the basis for revenue growth and the latter determines profitability. That is why, when looking at the prospectus for SpaceX it was the data on total addressable markets, unit economics and capital intensity that had a bigger impact on value, and this information, for the most part, was in the footnotes to the financials, rather than in the financial statements themselves.

    For those who are focused on value metrics/constraints (consistently money making, high profit margins and accounting returns)  and pricing multiples (low EV to EBITDA or low PE), the SpaceX prospectus is full of red flags. SpaceX is a company with small revenues and large losses, and paying a hundred times revenues for it (which is where a $1.8 trillion pricing would put it) seems foolhardy. I have no quarrels with this point of view, which animates old-time value investing, but this perspective comes with a cost in terms of investment choices. Investors who are wedded to never buying money losing companies or never paying more than twenty times earnings for a stock will end up with portfolios of mature (and declining) businesses. If that is their comfort zone, the strategy is perfectly defensible, but they should dispense with complaints about never being able to find high growth stocks to invest in or critiques of others who find these stocks attractive, notwithstanding the weak numbers. 

    There are many good arguments that can be made about why you should not invest in SpaceX, but basing that conclusion on the fact that they are money-losing or have negative cash flows or trade at a high multiple of revenues is both lazy and unconvincing. In contrast, making a case against investing in SpaceX because you believe that the target markets for its businesses will be far smaller than the company thinks they will be, or that cost and competitive pressures will drive margins down or even that you find its corporate governance structure and dependence on a personality (Elon Musk) off-putting is perfectly reasonable. If you do make that case, though, it is worth remembering that this is your point of view, and that disagreements about market size and profitability across investors, especially in young companies, are natural and healthy. In short, based on my inputs and story, I think that SpaceX is worth about $1.25-$1.3 trillion, but if you contend that it is worth $3 trillion or only half a trillion, it is neither my job nor my place to convince you that I am right and that you are wrong. 

The IPO Pricing Game

    In the coming weeks, you will undoubtedly be exposed to multiple perspectives on SpaceX, and that is healthy. That said, you will be better equipped to make sense of these perspectives, and perhaps incorporate some of the views into your own, and reject those that do not make sense, if you have an understanding of what an IPO process involves. In particular, understanding the motivations of the different players in the game (the investment bankers setting the offering price and managing the offering,  the issuing company, the investors and traders jockeying for shares at that offering price and the traders positioning themselves for the first day of trading) will help determine whether you should be playing this game or sitting it out, at least for the moment.

The Bankers

    Let's start with the sequencing that goes into a conventional initial public offering, though alternatives have emerged to it in recent years:

As you look at the role played by bankers to the IPO process, allowing them to keep a  slice of the IPO proceeds, the SpaceX IPO is a testimonial to the dwindling value added by bankers on every dimension:

1. Timing: It is urban (or market) legend that investment banks can time markets, and that this market timing can help determine the best time to go public. Just one look at the track record of market strategists at investment banks should dispense with this delusion, since banks (and most institutional investors) are (and have never been) good at gauging market momentum and shifts in mood. 
2. Filing and Offering details: It is true that there are technical details and logistical steps to filing a prospectus and setting offering details, but they are almost all mechanical. With SpaceX, I am not sure whether the prospectus, as filed, was the work of a team of bankers, but if it was, I wonder what an entirely Grok-written prospectus would have looked like, and whether we would have noticed the difference. 
3. Pricing: In an IPO, the bankers' mission is to price companies for their offering, not value them, and while they usually draw on pricing multiples and peer groups to make that pricing judgment, they are guided by the pricing in the most recent private transactions, usually in the form on venture capital rounds. With SpaceX, that task is simplified by the reality that this company, while private, has had active trading in its private shares, and that it was priced at roughly $1.2 trillion prior to the IPO process commencing. Adding the $75 billion in offering proceeds, and incorporating the advantages of increased liquidity from being a public company and becoming part of the S&P 500, it is not surprising that there is a sense that the offering will be priced at between $1.5 trillion to $2 trillion, with or without the investment banking input. My guess is that we will end up somewhere in the middle, with some handwaving about revenue multiples and other AI companies used to justify that pricing. (After I finished this post, a news story popped up that the offer price would be set at $135/share, translating into about a $1.8 trillion pricing for the company.)
4. Selling/Marketing: In an age where investment banks have lost credibility and social media is where marketing happens, SpaceX can generate its own marketing spin, and has an army of influencers behind it. In addition, almost every institutional investor has a point of view on whether to own SpaceX or not, it is unclear what exactly a roadyshow can do to augment the sales pitch.
5. Price guarantee: The pricing guarantee that investment bankers offer in initial public offerings is a mostly empty promise, since they systematically set offering prices at below (by 15-20%) what they believe the market will pay. That is the reason that the offer price for SpaceX will be set below the upper end of the range, and while the discount may seem like a significant loss to funders and current owners, the fact that the offering is for less than a tenth of the shares in the company will soften the blow.
6. Post-market support:  As a follow-up to the price guarantee, investment banks often offer after-market support for companies in the days after they go public, buying shares if the stock comes under selling pressure. With SpaceX, that option is off the table, since no investment bank has the capital to support the pricing of a two-trillion company, if investors turn negative on it.

In fact, given that banks are perhaps getting more from the initial public offering, in terms of publicity and allotments for their preferred clientele, than SpaceX is getting from their services, you could argue that the bankers should be paying the company for reflected glory, rather than charging them fees. The only good reason that I can think of for SpaceX not going the direct listing route, where you dispense with the kabuki dance of offerings and let the market set the offering price, is that the company needs the cash from the offering, and that route is much more difficult to take in a direct listing.

Issuer (Company, Founder and Investors)

    Looking at the IPO from the SpaceX perspective, the public offering will provide benefits. For the investors in the company in its private form, including venture capitalists from early in its life to public investors in more recent years, the IPO will allow them to cash out, albeit after the lock-out period expires in a few months. For the company, the increased access to capital from being a public company will allow it to fund the capital expenditures and investment needs that emanate from the company's ambitions in the AI business. For Elon Musk, the public offering has the potential to make him the first trillionaire in history, in addition to unlocking new pathways to further enrichment for meeting specified targets (including getting a million people on Mars).

   Since some of these benefits have been in existence for many years, the fact that company stayed private for that period is an indication that there are costs to going public that have held it back. The first is that, notwithstanding Musk's voting control of the company, become a public company will open SpaceX to market scrutiny, in the form of earnings reports every quarter and insider trading reports. The second is that the market is fickle, and while it is rewarding companies that invest in AI with high market prices today, it can change its mind and punish them for the same reason. The third is that while there is little that investors can do to trade and make money on overpriced private businesses, they can sell short on public companies.

Investors and Traders

    SpaceX is a company that has been in the public eye for a decade or more, even as a privately owned enterprise, partly because of its social media boosters and partly because its space launches make it a magnet for attention. There are many who are drawn to the company, but unable to invest in it as a private business, will now have a chance to do so, if it goes public. But should they try to partake in the initial offering? The answer to that question  depends on whether you are an investor, where you buy (sell) companies that you believe are trading under (over) their assessment of value and hope the gap closes or a trader, where you buy (sell) companies where you expect prices to go up (down) in the future, for a multitude of reasons, only some of which may relate to company fundamentals.

    I am more investor than trader, and I say that without judgment, since the end game in markets is to make money, not score intellectual points. The truth is that I am not a very good trader, and I am better off staying in my preferred domain, which is valuation, albeit with no guarantees of a payoff.  My valuation of SpaceX was driven by my interest in the company and belief that it is in unique, cutting-edge businesses, and my decision on whether to buy into the offering is therefore driven by my assessment of its value. At the rumored pricing of $1.8 trillion for the company, it is too richly priced for my tastes, given my valuation of $1.25-$1.35 trillion for the equity in the company. That does not mean that I will never buy the stock, since the market does change its mind, and if the price does drop by enough, my decision would change accordingly. It is worth remembering that Facebook was selling at half its offering price a few months after its IPO, and that Uber lost more than 50% of its market cap in the year after its public offering, moving both companies from over to under valued.

    If you are a trader, though, the game changes. Specifically, the intrinsic value of the company is not central to your decision, perhaps even irrelevant, and your judgment on whether you seek to partake in the SpaceX offering will depend on your reading of market mood and momentum. I would not be surprised in the least to see the offering priced at $1.8 trillion, and see a jump in the price on the day of or in the weeks after the offering, and if that is your most likely scenario, being able to get into the offering at the offer price or even in the first few hours or days of trading will be a winning strategy. The risk, of course, is that momentum can shift quickly, causing a significant price drop, effectively making  timing your trades right key to your trading strategy. The shifting and often unpredictable forces of mood and momentum are also the reason that as an investor, I would not sell short, notwithstanding my value assessment, even if the pricing for the company pushes from $1.8 trillion to $2 trillion or more. 

A Loaded Bet on AI!

    As the IPO process for SpaceX heats up in the coming weeks, you should prepare yourself for a flood of selling from the company and its bankers, with talk of possibilities and potential dominating the discussion, as well as arguments from the other side, where it will be framed as a vehicle for AI hype, destined to fail. If you are on the receiving end of these sales pitches, you should listen but check the numbers for plausibility and make your own judgments. For the bankers involved and the issuing company, the biggest danger to a successful offering is not that there will be near-term reality checks on their hype, but that the market mood will shift, either in the aggregate or specifically related to AI, in the weeks leading up to the offering.  No matter what your views are about the SpaceX IPO, positive or negative, there is no denying that this company is a loaded bet on the AI  and Elon Musk, and while that may concern some, there are others who will look at Musk's track record with Tesla and feel the odds are in their favor. 

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Attachments

1. SpaceX prospectus
2. Valuation of SpaceX, post-prospectus on 6/2/26

Blog posts on SpaceX

1. To a Trillion(s) and Beyond: A SpaceX Odyssey!

An Ode to Restraint: Lessons from the Tim Cook Legacy

    Through time, we have glorified conquerors and empire builders in politics, civic life and business, from Alexander the Great and Genghis Khan to the tech titans of today. That is no surprise, since these individuals have oversized personas and often change the course of history, but it is also true that this glorification of empire building has shortcomings. The first is the deification of these heroes comes with whitewashing of the dark sides and the costs of empire building. The second is that we discount and undervalue those who make contributions to societal or business advances, but do so quietly and with little fanfare. It is in this context that I was drawn to the story of Tim Cook stepping down as Apple CEO, after a tenure of fifteen years atop a company that has been among the top market cap companies in the world for much of that period. While Steve Jobs, his predecessor as CEO at Apple, has now been deified in business circles, as an unparalleled visionary and business builder, and deservedly so, I think that Tim Cook, in many ways, has played just as significant a role in molding the company into its current day standing, with far less recognition.

Apple's CEOs: From Scott to Jobs to Cook!

    Unfair though this may seem, the Tim Cook story at Apple has to start with Steve Jobs. Jobs co-founded the company in 1976, with Steve Wozniak, and while the company went through a series of CEOs in the next two decades, Jobs was the face of the company in its early years. While it is easy, with the benefit of hindsight, to view these as good years for the company, those early years reflected both Job's strengths and weaknesses. His vision and force of personality gave rise to the personal computer in its current form, as a tool for everyone to use, not just tech geeks, and as someone who bought his first Mac (the 128K without a hard drive) in 1984, and has stayed a Mac user since, I am grateful. That said, the dark side of Jobs, manifested in impatience with underlings and an obstinate belief that he knew what customers needed better than they did, led to the Lisa, the only Mac I regretted buying almost immediately after my purchase, and a loss of business markets to Microsoft. Those failures led Apple to the brink of failure, and to Jobs being cast out of the company by its board in 1985, though the CEOs that followed had neither the strategic vision nor the business-building capacity to rescue the company.

    In 1997, Apple looked like it was a company heading into oblivion, as Windows became the dominant operating system for personal computers, and it seemed like Apple had lost its purpose. The August 1997 return of Steve Jobs,, who had used his years in the wilderness to build Pixar, a company that revolutionized animated movie making, is now the stuff of legend, as he rebuilt Apple in the ensuing years into a powerhouse, around the iPod, the iPad and most of all the iPhone. While there are books and movies chronicling the Steve Jobs success story, it is worth asking what the difference was between the first iteration of Steve Jobs at Apple (from founding to leaving in 1985), where Apple lost ground to Microsoft, and the second iteration of Steve Jobs (from his return in late 1997 until his resignation in 2011). The first was that he was older, and to the extent that with age comes some wisdom, it helped, but it is unlikely to have been the change maker. The second was that in his period away from Apple, Jobs created and built up other companies, with Pixar being the biggest, where he learned to deal with people better and perhaps compromise a bit more than he used to. The third was that he benefited from the presence of Tim Cook, first as an executive in Apple sales and operations, and more importantly, as chief operating officer (COO) for Apple, starting in 2005. If Steve's skill was vision, where he showcased Apple's next "big innovation" at meetings in his trademark black turtleneck, Cook's skill was building manufacturing hubs and supply chains to convert the vision to products. That separation of vision from business building created the Apple juggernaut in the first decade of this century. While that division of labor clearly was in the company's best interests, Jobs deserves credit for being willing to set his ego aside and delegate the powers to make it happen.

    Tim Cook has been CEO for fifteen years, and when he retires on September 1, 2026, he will have been the longest serving CEO at Apple. It cannot have been easy, especially in the early years, as the comparisons to Steve Jobs were front and center, and there was pressure on him to continue in the same path. To Cook's credit, he never tried to be Jobs, and he created a very different template for himself, one that fit him and the company well, and served as a testimonial to his self assurance. In one of my talks about a decade ago about Apple, I described Cook, perhaps harshly, as a man without a visionary bone in his body, but one who would make sure that the trains ran on time (or the iPhones were delivered as promised), and I think that he has used that strength to good effect during his years as CEO of the company.

Apple's Finances in the Twenty First Century: The Steve Jobs and Tim Cook Years!

    Steve Jobs handed over a company to Tim Cook in 2011, that was extraordinarily profitable, and at the time of his leaving, already the largest market cap company in the world. While that fact leads some to discount what Cook has done at Apple since, I think it is worth going back in history and looking at corporate handoffs of great companies, and how often they become tangled messes, as new CEOs overreach and overpromise. 

    The place to begin our comparison of the Jobs and Cook tenures is by charting Apple's market capitalization, with the delineation into the Jobs years (1998-2011) and the Cook years (2012-2026):

Looking across the aggregated years across both CEOs, it has been an extraordinary time. Apple began the Jobs tenure as CEO with a market cap of $1.68 billion, and by the end of 2025, its market cap had risen to over $4 trillion, and its performance burnishes the reputations of both Jobs and Cook. Jobs provided the foundational boost for the company and the innovations he presided over delivered a compounded annual price appreciation of 47.19% between 1997 and 2011, a period when US equities were struggling and Apple reached the top of the market cap table in 2011. With Tim Cook at the helm, Apple added an astounding $3.64 trillion in market cap, but a strong equity market provided strong tailwinds, and the company's annual returns were more modest.  On a percentage return basis, the Jobs years were better, but in my view, the fact that the annual returns in the Cook years were just as impressive, because they had to be earned on a much larger firm. 

    The reasons for Apple's sustained increase in market capitalization were simple - solid revenue growth and a profit machine that delivered high margins, even as the company scaled up:

As with the market capitalization comparisons, this chart yields metrics that are favorable to both Jobs and Cook. Under Jobs, the company scaled up its revenues significantly, with a compounded annual revenue growth rate of 23.67% between 1997 and 2011, and just as significantly, went from posting subpar margins and a net loss in 1997 to becoming one of the most profitable tech companies in the world, Under Cook, revenue growth rates came down (to a compounded annual average of 8.52% between 2012 and 2025), but on a much larger scale, and the company preserved and grew its profit margins.

    There was one corporate finance dimension on which Cook deviated from Jobs, and that was on cash return or dividend policy. In the chart below, I look at the cash returned to shareholders by Apple during the tenures of the two CEOs:

During Job's tenure at Apple, the company paid no dividends and initiated only modest cash buybacks, mostly to cover stock-based compensations. With Tim Cook as CEO, Apple was one of the greatest corporate cash success stories of all time, initiating dividends in 2012 and increasing them over time, and supplementing those dividends with cash buybacks that, in the aggregate, were the largest in corporate history. In sum, the company has bought back almost $800 billion between 2012 and 2025, and the most astonishing feature was that, while returning all of this cash, the company also accumulated one of the largest corporate cash balances in history.

    To the question of how Apple was able to return this much cash, increase its cash balance and still grow itself, the answers are three fold. The first is that the iPhone, perhaps the most valuable single product in business history, continued to deliver for the company, with modest reinvestment needed on its upgrades. 

While much of the credit for the iPhone is still given to Steve Jobs, and rightly so for fostering the innovation, credit is also due to Cook, who has taken the franchise handed to him, and grown it on steroids. The second is that the company borrowed $17 billion in 2013, a Cook departure from a Jobs practice of avoiding debt, and it has added to that debt load over time, though it remains a small slice of overall value:

While much is made of Apple's debt foray, it is worth recognizing that Apple is still a very lightly indebted company on any debt metric, and that if you net the company's considerable cash balance out against its total debt, its net debt has always been negative (cash exceeds debt). In fact, Apple's use of debt is so light that the only rationale for its existence is creating a presence in the bond market, just in case it needs to use it more in the future. The third feature is that the company has been cautious in its forays into new products and markets, especially outside its domain, and this shows  up in two data series.

• The first is that while Apple has acquired more than a hundred companies, almost all of them are small, private technology companies with small price tags, with the intent being bringing their products and services into the Apple ecosystem after the acquisition. In fact, its largest acquisitions during this century are so small that they represent petty cash, relative to its cash balance as a company. Beats, for instance, which was one of Apple's biggest acquisitions cost the company about $3 billion, a number dwarfed by its cash balance that year, which was more than $100 billion.
• The second is that in the last five years, as big tech companies have gone on an AI capital expenditure binge, Apple has been the outlier, holding back on its AI investments, and this can be seen in the chart below, where I compare Apple's capital expenditures to those of the rest of the Mag Seven:
  
  
  As the rest of the group has ramped up its capital investments, with much of it going into AI, Apple has held back, and its share of the total cap ex at the companies has fallen from 8.04% to 3.02% over the period.

In sum, looking at the changes at Apple over the last fifteen years, the company has changed from the growth engine, driven by disruptions, in the Jobs years to a mature, cash-returning and more cautious company under Cook. I have posted more about Apple than about any other company in the world (and I have a sampling of some of those posts at the end of this post) and have been a shareholder in the company for significant portions of both the Jobs and Cook tenures. I have not always agreed with either man, on choices that they have made at the company, but I respected both of them enough to view them as good stewards of my investment. In a world full of CEOs who are quick to herd to what the consensus view is, I admire both men for their willingness to stand on their beliefs.

Vision or Restraint: A Life Cycle Perspective

    If you were to create a profile of Tim Cook, the manager, based upon the choices that he has made at Apple during his tenure as CEO, two very divergent views emerge. To his admirers, his actions on some fronts (initiating dividends, massive stock buybacks, borrowing money) and inaction on other fronts (no big acquisitions, diffidence on AI investments), represent an exercise in discipline and restraint,  preserving the company's crown jewel (the iPhone) and fending off the bankers and consultants, with their false promises.  To his critics, and there are quite a few, Cook's caution has cost Apple its disruptor status, when it could have used its ample cash reserves to buy its way or invest in into almost every new business that has bloomed in the last fifteen years. In fact, they point to chances that Apple has had to buy some of the biggest stars in the market, from Tesla and Netflix more than a decade ago to Anthropic, Mistral and Perplexity in more recent years. 

        It is impossible to argue that one side is right and the other side wrong, but it is undeniable that both pathways (the restrained pathway that Apple adopted and the more aggressive pathway that it could have taken) include trade offs. It is true that Apple's restraint has led it to miss out on some of the biggest trends in technology over the last decade, but it has also avoided the overpayment that is so common with high profile acquisitions of big companies. The argument that Apple would be worth a lot more today if it had bought Netflix or Tesla a decade ago falls flat for two reasons. The first is the selection bias in picking two companies that, in hindsight, have emerged as winners, when in fact there were at least a dozen other worse-performing companies that were also on Apple's radar. The second is the presumption that companies like Tesla or Netflix would have been just as successful, owned by Apple, as they were as stand alone enterprises. The clash of corporate cultures that would have ensued if Apple had bought either Tesla, a company that reinvents its business narrative every few hours, or Netflix, an entity that makes content in quantity with the hope that some it sticks, would have been epic, with the risk that both Apple and its acquired target would have gone down in flames.

    More generally, though, the question of whether you want a visionary or a disciplined business builder at the top of a firm is not one that has an easy answer, since it depends on the firm in question. In my work on corporate life cycles, I focus on the management skills that are needed most in a company, based upon where it is the life cycle, and that may help address the choice between vision and restraint:

With young companies, vision dominates, as managers work to sway investors, employees and nascent customers that their product or service will find a market. As the vision takes hold, converting it into commercial products and services requires trading off some portions of vision for pragmatism, in the interest of getting the business going. As products and services find demand among customers, business building becomes a key difference-maker, with the grunt work of marketing, production facilities and supply chains coming into play. Assuming that you have made it through these three stages, the trade offs of scaling up come into focus, and as you hit market limits, success depends on being opportunistic in finding new products and markets, but only if they exist. In corporate middle age, pathways to easy growth, especially at scale, become difficult to find, and to the extent that value comes from moats and core products, playing defense against competitors takes priority. Finally, in decline, a phase that no company ever wants to enter, but is inevitable at some point, you need to be willing to shrink a firm, shutting down businesses that no longer deliver value and selling other assets to high bidders.

    Given these very divergent management functions, it should come as no surprise that there is no prototype for the perfect CEO, McKinsey and Harvard Business School blueprints notwithstanding. Viewed in this framework, I would argue that Apple has been lucky with its last two CEOs, both in terms of persona and in terms of sequence. When Steve Jobs rejoined Apple in 1997, the company had hit rock bottom, and with little to offer in liquidation, his vision allowed for a reincarnation, with disruptions leading the way, and as we noted earlier in this post, having a strong chief operating officer in Tim Cook made the difference. The Apple that Tim Cook inherited, when he became CEO, was a very different entity, already the world's largest market cap company, with a superlative franchise in the iPhone. In corporate life cycle terms, Apple was a mature growth company, and what Cook lacked in opportunism , he made up for by defending Apple's biggest product line(iPhone) and augmenting value with increments like the app store and devices. That said, while each of these men created value for shareholders, I don't think that either would be regarded as highly, if you swapped their tenures in terms of timing. I don't think Tim Cook would have been able to bring Apple from its near-demise to being on top of the corporate universe, if he had become CEO in 1997, and I think Steve Jobs would have been ill-suited to the Apple that was in existence in 2011. 

Aging, Management Mismatches and Corporate Governance

    In a post from a few years ago, I used the connection between CEO type and corporate lifecycle to examine why management mismatches occur at firms, and the consequences of that mismatch. Specifically, there are three confounding factors that can make matching up CEO to company, given where it is in the life cycle, complicated:

1. Like humans, companies age, but unlike humans, the rates at which different companies go through the life cycle can be wildly different. An infrastructure or manufacturing company can take decades to become operational, followed by extended phases of growth and maturity, before going into decline. In contrast, a tech company can have explosive growth early in its life, spend a brief period enjoying the fruits of its success as a mature company before declining precipitously. As a consequence, managers and investors who use chronological age as their corporate aging metric can misjudge where they are on the life cycle.
2. While aging is inevitable for both humans and businesses, some mature or even declining businesses can find pathways, either through happenstance or management choices, to rediscover their youth. These businesses become the stuff of legend, and they are the subjects of books and business school case studies, and their CEOs are elevated to management deities. 
3. The narratives built around companies that reincarnate and the CEOs atop these companies also feed into management incentives and behavior. The story of Steve Jobs at Apple has been told and retold, but it is worth remembering that for every story of reincarnation, there are a hundred stories you can tell about other CEOs who tried to follow the Apple playbook, spending billions on reinventing their companies, with little to show in terms of payoffs. (See my posts on Marissa Mayer at Yahoo! and on Blackberry.) In essence, the glorification of CEOs who bet big on turnarounds at mature or declining companies, and win, sets up CEOs facing similar circumstances to behave like riverboat gamblers, when making management choices at their firms. After all, if their bets pay off, they join the legend crowd, and if they do not, they contend that they did their best, and that circumstances conspired to bring them down.

The bottom line is that there are a number of ways in which you can end up with CEO mismatches - a CEO who cannot adapt to the changing demands of an aging business, a hiring mistake or even changes in the macro environment, and when those mismatches occur, is is inevitable that there will be friction between the CEO and shareholders. In a sense, almost all corporate governance challenges can be traced back to management mismatches, and the power (or the absence of it) that shareholders have to fix those mismatches:

While Tim Cook's time as CEO of Apple is now seen through rose-colored lens, it is worth remembering that Apple was targeted repeated early in his tenure by activist investors. While some of the changes that these activists were pushing for were warranted, some were not, and Cook deserves credit for not capitulating. Carl Icahn, for instance, wanted Apple to increase its debt substantially, borrowing hundreds of billions, but I took issue with his argument that Apple could borrow this money at the low rates that he was extrapolating. A couple of years later, David Einhorn made his play, arguing that Apple should issue preferred shares with a 4% dividend yield, and I noted that preferred stock could bring with it all of the cashflow commitments of debt, with none of the tax advantages. I have long argued that the best defense a management has against activist investors is delivering superior performance and returns, and Tim Cook delivered on both dimensions, and faced little more than sniping from disgruntled investors in his later years as CEO. In the last four years, the criticism has come primarily from analysts who fault his caution, and argue that Apple risks falling behind its more aggressive competitors in the AI race, but here again, Cook has stood his ground.

Management Transitions, Past and Present - The Mag Seven

    I don't envy John Ternus, who is Cook's heir apparent, because he is following two CEOs who were immensely successful, albeit in different ways. If there are lessons he can learn from both Jobs and Cook, they include the following:

• Find your own path: There will be pressure from some investors to be just like Jobs, and go for big disruptions, or from others to imitate Tim Cook, and leave Apple as a cash machine. While it may take time, Ternus has to find his own path as CEO, based on not only what he brings to the table, given his background in computer hardware, but on what Apple's strengths are as a company in 2026 and the markets it is facing right now.
• Adapt to the company you are managing: Just as the Apple that Jobs took over in 1997 was very different from the Apple that he handed over to Cook in 2011, the company that Ternus takes over is different from the ones handed over in either of the prior iterations. When you are at the helm of one of the largest market cap companies in the world, you have to start with the recognition that any new product or service that you introduce will have to be huge to make a dent in the operating metrics (revenues and profits) or market capitalization. In addition, the franchise that holds up the company's cash machine is the iPhone, and Ternus cannot afford to take his eyes of that prize. 
• Keep the feedback loop open: When you are a company worth trillions, with legions of shareholders, and hundreds of analysts, you will have advice meted to you constantly on what you should or should not do. Much of that advice will be bad, and should be dismissed, but some of it is worth listening to and perhaps converted into policy. In addition, as CEO, I hope that Ternus views the market price as a crowd judgment on Apple's actions rather than the product of speculation, and accepts that while that judgment can be wrong, it should be taken seriously. 

I wish Mr. Ternus the best, for purely selfish reasons. As a Mac and Apple device user, I want the company to prosper and continue to make products that I can continue to use on a daily basis, and as a shareholder, I want my investment to do well. 

    The attention, in this post has been on the management transition at Apple, but management transitions are part and parcel of every company, with the changes sometimes forced on the company and sometimes voluntary. Expanding the discussion of management to the other companies in the Mag Seven can provide us with an opportunity to examine management transitions that have either already happened or that will happen in the future, and the ensuing frictions:

• At Microsoft, the only company in this group that traces its vintage back to Apple, there have been two CEO transitions, from Bill Gates to Steve Ballmer in 2000, and from Ballmer to Satya Nadella in 2014. While Gates built Office and Windows into cash cows, and Ballmer preserved them, Nadella created his own pathway to reincarnation by building up a cloud business that is now the dominant source of revenues for the company. By partnering early with OpenAI on LLMs, and investing massively in data centers, Nadella is now making a bet that AI can provide a further boost to the company's operations, perhaps setting the stage for a second rebirth.
• Amazon has seen a management transition, where a legendary founder (Bezos) left the firm in 2021, and his successor (Andy Jassy) has taken the reins, with remarkably little fanfare. Like Nadella, though, Jassy is betting big on AI being a growth and value driver, and the success or failure of that bet will largely determine how his stint as CEO gets judged.
• Alphabet offers a case study of a company that tried to split the difference, by separating its cash cow (Google advertising) from its other businesses, naming Sundar Pichai as the CEO for Google, while remaining atop the other Google businesses (the bets in Alphabet). That experiment has struggled to deliver, as the other businesses remained earth-bound and in 2019, and Pichai took over as CEO of Alphabet as well. Over its lifetime, Alphabet has been immensely successful in coming up with products and services that catch public attention, whether it be its development of the Android operating system or its work on Waymo or Gemini, but it has struggled to convert those successes into revenues and operating profits.
• In three of the companies (Tesla, Meta and Nvidia), founders remain CEOs, though they bring very different perspectives and personalities into their roles. As I noted in my last post on SpaceX, Musk has veered between genius and eccentricity in his stewardship, but shareholders at Tesla have largely benefited from the rollercoaster ride. At Meta, Zuckerberg has been a shrewd businessperson in his management of his social media holdings, with savvy acquisitions of Instagram and Whatsapp boosting his ad-driven ecosystem, but he has also been headstrong in his pursuit of ventures that he feels are the "next big thing".  His expensive failed bet on the Metaverse led some investors to question his governance, and many of these investors worry that his bet on AI will play out similarly. Finally, on Nvidia, the company's soaring market capitalization and huge success with AI chips has pushed Jensen Huang into the spotlight, but less than a decade ago, there were questions about his management as well.

The fact that all six of these companies have invested heavily in AI is a lead-in to what could be the key test for management at all of them. If the AI investments pay off and deliver value, Nadella will cement his legend status, Jassy will have created his own legacy at Amazon, the Alphabet experiment will finally pay off, and the founder-run companies will have more room to run. If the AI investments fail, though, Nadella's reincarnation reputation will take a hit and Jassy's position atop Amazon will be at-risk. The AI failure will also raise doubts about Alphabet's capacity to grow beyond advertising and the rumblings about Zuckerberg's big bets will get louder, but at these two companies, it is unclear what investors, no matter how large their holdings are, can do, since they have acquiesced to a voting share structure at these two companies that has reduced them to bystander status. At Alphabet, Brin and Page control 51% of the voting rights, with less than 10% ownership, and at Meta, Zuckerberg controls 57% of the voting rights, with about 13% of share ownership.

  

An Ode to Restraint

    While there are many who compare to Tim Cook to Steve Jobs and find him wanting on vision and flair, I am grateful, as an investor in Apple, for the restraint and discipline that he brought to the job. That gratitude will stay intact even if Apple's caution on AI turns out to be a mistake, since the restraint and rectitude that Cook brought to his job are management qualities that significantly undervalued. I don't teach from or write cases, but I would love to see more business school cases about CEOs like Cook who are not easily swayed by the temptation of more growth and ego-driven acquisitions. I loved the Steve Jobs movie, but I don't expect to see a Tim Cook movie anytime soon, and while that is understandable, it also explains why we will continue to have too many CEOs at companies viewing themselves as saviors, gambling shareholder money on turnarounds and rescues, when the better pathway would be acceptance and shrinkage. I believe that investors lose more money from companies trying to do too much rather than from them doing too little, and from overreaching than from underachieving.

YouTube Video

My posts on Apple

1. Apple: Thoughts on Bias, Value, Excess Cash & Dividends (March 1, 2012)
2. Apple: Know when to hold 'em, know when to fold 'em (April 3, 2012)
3. Emotions, Intrinsic value and Dividend Clienteles: The Apple postscript (April 6, 2012)
4. Apple's Crown Jewel: Valuing the iPhone Franchise (August 29, 2012)
5. The Year in Review: Apple's Universe (December 2012)
6. Are you a value investor? Take the Apple Test! (January 2013)
7. Back to Apple: Thoughts on value, price and the confidence gap (February 7, 2013)
8. Financial Alchemy: David Einhorn's value play for Apple (February 8, 2013)
9. Apple: News, Noise and Value (April 30, 2013)
10. Love the company! Love the product! Love the stock! (September 9, 2013)
11. Watch the Gap: Apple's Long and Twisted Journey (April 2014)
12. The Race to the Top: The Duel between Alphabet and Apple (February 2016)
13. Icahn exits, Buffett enters: Whither Apple (June 2016)
14. Apple: The Greatest Cash Machine in History (February 2017)
15. Investor Whiplash: Looking for Closure with Apple and Alphabet (December 2018)

My book on the corporate life cycle

1. The Corporate Life Cycle