IPO market poised to thaw as stocks heat up
A resilient US economy is breathing new life into a dormant IPO market.
Deal values for traditional public listings from the start of the year through July 25 have more than doubled from the same period in 2022, according to data from Dealogic. And the number of IPOs in the US have shot up more than 25% compared to last year.
As Wall Street sheds some of the pessimism that defined much of last year, the IPO market is poised to ride the momentum. The Dow Jones Industrial Average (^DJI) just ended a near-historic win streak as it chases new highs. The Nasdaq Composite (^IXIC) had its best first half of the year in four decades while the S&P 500 (^GSPC) rose 19% in the first six months of 2023.
The beauty company Oddity Tech (ODD) flashed a potential sign of things to come when it debuted last week, surging more than 40% from its initial price. And last month, shares of the Mediterranean-style restaurant chain Cava (CAVA) roughly doubled in value during its stock market debut and continue to trade well above 100% of the IPO price.
Looking ahead, the pipeline is growing as companies such as Birkenstock, Arm, and Klaviyo are widely expected to go public in the fall. Sharing economy businesses, Instacart and Turo, which have previously delayed their public offerings, could potentially tap the IPO market by the end of the year, said Nicole Tanenbaum, partner and chief investment strategist at Chequers Financial Management.
After a down-in-the-dumps period, when businesses perceived that the IPO market was frozen, companies are now finding intense investor appetite for the next big thing.
"We have the ingredients for a much more normalized level of IPO activity," said Steve Parish, co-head of ICR Capital.
While IPO deal values so far this year are still well below prior averages, the harsh conditions that sank the market are easing. Peaking interest rates, earnings reports beating analyst estimates, and the prevailing sense that the economy has not fallen off the cliff indicate that the pieces are in place for renewed levels of IPO activity, Parish said.
The IPO market nosedived last year. Only 87 companies debuted on the public markets in a traditional IPO in 2022, Dealogic data shows, marking a steep drop from the nearly 400 companies that listed the year prior. The comedown reflected the stalled stock market and the unpleasant swirl of historic inflation and fears of a rate-hike-fueled recession.
In the booming IPO backdrop of 2020 and 2021, interest rates were low and risk appetite was high. Investors were more than willing to pay premium valuations to unprofitable companies with the hopes of receiving outsized returns down the road, said Tanenbaum. The impact of global central banks lifting interest rates essentially hit the reset button on valuations across the equity markets. The higher cost of borrowing put a damper on investments, especially for companies that had yet to turn a profit.
"The result has been limited appetite for IPO activity as investors became far less willing to pay a premium for the prospect of future profitability, which has been difficult to forecast in the current environment," Tanenbaum said. Companies have been reluctant to adjust to a new world with lower valuations, while investors, still licking their wounds from losses on high-flying public offerings and SPACs, have remained wary amidst an uncertain economic backdrop, she said.
But as that pessimism has lifted, so has interest in diving into the public markets. The period of economic uncertainty also forced executives to place heightened attention on cost-cutting and profitability, making the next crop of IPO companies more attractive to investors.
Even with heightened demand, some private companies are biding their time. Many businesses are simply not ready or willing to tap the public markets. Stripe chose instead to raise private capital, Reddit delayed any immediate plans to go public, and Aleph Group withdrew its filing completely, Tanenbaum said.
Hamza Shaban is a reporter for Yahoo Finance covering markets and the economy. Follow Hamza on Twitter @hshaban.
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