AI’s mega stock deals raise specter of more shares than buyers

“This is something that we haven’t seen in such a scale and in such a short time. It’s a huge supply event.”

A flood of new shares from companies looking to fund their artificial intelligence ambitions is raising questions on Wall Street about whether there will be enough buyers to soak them all up and what this pile of fresh equity will mean for stock prices more broadly.

Initial public offerings from SpaceX, Anthropic and OpenAI in the coming months could add close to $4 trillion in market capitalization to US exchanges, according to data compiled by Bloomberg. Already, the SpaceX deal has drawn more orders than shares available in the filing. Meanwhile, Alphabet Inc. is planing to raise $85 billion next quarter by selling stock, mostly into the open market, a move that could be followed by other technology giants in need of cash for AI data centers. 

“This is something that we haven’t seen in such a scale and in such a short time,” said Ano Kuhanathan, head of corporate research at Allianz Trade. “It’s a huge supply event.”

The sellers seemingly have a lot going for them at the moment. AI investments are booming, spurring strong revenue growth. Chipmakers are soaring, with the Philadelphia Stock Exchange Semiconductor Index on pace for its best year since 2003 with an 74% gain. Even old-school tech companies like Cisco Systems Inc., Nokia Oyj and Dell Technologies Inc. have caught a bid from AI enthusiasm.

Of course the timing could turn out to be less than ideal, as investors are starting to question if the rally has gone too far. The Nasdaq 100 Index sank 4.8% on Friday, its worst session in over a year. A report that Meta Platforms Inc. is considering raising tens of billions in a stock offering sent its shares down 5.5%. 

Still, Wall Street pros are confident the demand ultimately will be there when those new shares are available.

“There is plenty of capital available to absorb not just this year’s IPOs, but also primary stock offerings by already public companies in need of cash to build out AI,” Nicholas Colas, co-founder of DataTrek Research, wrote in a note to clients last week.

Part of what’s expected to make it easier for the market to digest the mega IPOs is the issuers are only selling a small portion of their outstanding stock, keeping their floats, or the number of shares available to trade, contained. For example, SpaceX, whose formal name is Space Exploration Technologies Corp., expects to offer just 4% of its outstanding stock. But that should change in the months ahead as restrictions on selling by long-time investors and company insiders expire and they begin to monetize their positions by selling portions of their stakes.

Read More: SpaceX Staff Team Up for Lower Fees, Tax-Saving Tools Before IPO

Historically, large IPOs with average initial floats of less than 10% of outstanding shares see that figure balloon to around 46% a year after their debuts, according to data compiled by Goldman Sachs. That would mean roughly $1 trillion of new equity supply by 2027, in addition to any direct corporate issuance, Goldman strategists led by Ben Snider wrote in a research note dated May 29.

“Once those companies are fully in the market, it’s going to create quite a shock,” said Allianz Trade’s Kuhanathan.

Fast Track to Indexes

Adding to the potential chaos are rule changes by index providers Nasdaq Inc. and FTSE Russell that will speed the entry of SpaceX, Anthropic and OpenAI into their flagship indexes. Considering the passive followings of these benchmarks, the companies’ inclusion could create extreme demand for their shares as exchange-traded funds tracking the gauges are forced to match the new index weightings. 

The flipside, of course, is index funds will also have to trim current positions to make room for new entrants when they eventually join the indexes, according to Research Affiliates founder Rob Arnott. If they continue to float shares over time, smaller firms could see their index weights erode gradually, he said. 

“There’s going to be this drip, drip pressure every time they float some new stock,” Arnott said in an interview in London last week, predicting that frequent index rebalancing will also drive “a wedge in valuation between the newbies and the old companies.”

On Thursday, S&P Dow Jones Indices rejected proposals that would have shortened the 12-month delay for newly listed companies to appear in its indexes and waive existing profitability requirements.

Read More: S&P’s SpaceX Snub Shows Elon Musk the Power of Index Gatekeepers

“These behemoth IPOs will rapidly take up both the market share of benchmarks and the mindshare of retail investors,” said Max Gokhman, senior vice president at Franklin Templeton Investment Solutions. “But once the lockups end and the floodgates open for employees and venture investors to realize significant wealth, the marginal selling pressure can upset an already fragile setup.”

The erosion Arnott warns about could go beyond old economy companies and small stocks. The AI boom has been different than past euphoric periods because investors haven’t been able to buy the firms driving so much of the action: OpenAI and Anthropic. Instead, they’ve been forced to pour money into companies that are close to them as customers, partners or both. 

A basket of stocks exposed to OpenAI tracked by Bloomberg is up 33% this year, dwarfing the S&P 500’s 7.9% rise. Marvell Technology Inc., which is building custom chips that are being used by OpenAI and Anthropic, has soared 210%.

The catch is, once the startups most responsible for AI have publicly traded shares, investors are likely to sell many of these positions and use their profits to buy into Anthropic, OpenAI or SpaceX, according to Nigel Green, chief investment officer at DeVere Group. 

“Investors have spent years buying proxies because they couldn’t buy the assets directly,” said Green. “If investors can eventually own OpenAI itself, some of the scarcity value attached to that relationship inevitably changes.”

The selling could hit chipmakers Nvidia Corp. and Broadcom Inc., which have been key drivers of the S&P 500’s gains over the past three years. 

And then there’s Tesla Inc. The electric-vehicle maker’s stock has been the only way for retail investors to bet on billionaire Elon Musk since it went public in 2010. That changes when SpaceX starts trading, which is expected on Friday. Indeed, SpaceX may become the new preferred vehicle for Musk wagers since he has more control over this company and it houses xAI, which Wall Street expects to drive most of its growth.

Read More: Tesla Shares Need New ‘Razzle-Dazzle’ as EVs Slow, AI Hype Cools

Of course, there’s always a risk that investors will balk at paying steep prices to own new shares of money losing companies. 

SpaceX, for example, had an operating loss of $6.4 billion last year and would be priced at more than 90 times last year’s sales at the $135 share price it’s targeting. Numbers like that certainly represent a risk. But with the offering oversubscribed, they’re clearly not something investors are too worried about —  at least for now.

“It isn’t all going to be sunshine and rainbows,” said Anthony Saglimbene, chief market strategist at Ameriprise. “They’re going public in an environment where expectations are so high that there’s little room for error. And they’re going public at such large sizes that investors will be less forgiving over the next 12 months.”

This story was originally featured on Fortune.com