Since stocks took off on a powerful rally in late October, one typical ingredient of a healthy market has been hard to find: IPOs.
A strong level of initial public offerings signals investors feel confident enough in the economy to embrace newer stocks, which tend to be riskier. IPO stocks also supply the market with new blood — often young companies with new business ideas or technologies that have the potential to produce superior growth over time.
So the early success of Reddit and Astera Labs cheered market watchers. On March 21, social media platform Reddit soared 48% in its debut. The day before, AI chip play Astera Labs surged 72% on its first trading day.
But don't expect the IPO pipeline to release a sudden gush of new names. Analysts generally expect the pace of IPOs hitting the market to recover, but probably not until later in the year.
Scores of companies registered for initial public offerings are opting not to jump into the public arena just yet. IPOs for 2024 are running only narrowly ahead of the weak number of launches last year.
To be sure, the Securities and Exchange Commission's IPO pipeline is reportedly bulging with new filings. But the IPO calendar remains thin into April.
Recent IPOs Performance A Key Indicator
The performance of recent IPOs will factor into companies' decisions on when to list their stocks. Besides Reddit and Astera, they may be watching chip designer Arm Holdings, which Wednesday closed 146% higher than its IPO price in September, or two other fall IPO stocks, Birkenstock and Instacart parent Maplebear.
(Another new stock, though not an IPO, is Trump Media & Technology, which began trading on the public market after it was acquired by a SPAC, or special-purpose acquisition company.)
Obvious factors — the economy, inflation, interest rates — continue to temper enthusiasm to launch new IPOs. Less obvious: elevated valuations from prior venture capital fundraising rounds.
"There remains a risk-off attitude in the public markets," said Kyle Stanford, lead VC analyst at PitchBook. "And tech startups and unicorns are incredibly risky when compared with other areas of the market."
Environment For IPO stocks
Despite the strong reception for Reddit and Astera Labs, the overall environment for IPOs hasn't changed much from last year.
"We expect to see relatively few (tech) IPOs this year, especially in the first half," Stanford said.
The number of U.S. IPOs dropped to 102 in 2023. The total value of shares sold fell to $15.76 billion from $20.92 billion in 2022. That's well below the 2021 high of 906 U.S. IPOs with an offering total of $286.98 billion, according to S&P Global Market Intelligence.
Nasdaq CEO Adena Friedman said close to 100 companies have filed confidentially with the Securities and Exchange Commission for initial public offerings and plan to list on the Nasdaq, according to a Jan. 11 interview with Barron's.
Confidential filings allow companies to keep their S-1 filing undisclosed until 15 days prior to their actual IPO. This keeps vital information away from competitors until a company is set to launch. It also means there is a much larger universe of companies poised to hit the market when the time is right than some data suggest.
"The pipeline for companies needing to go public is large, and it continues to grow," Pitchbook's Stanford said.
But he noted that markets remain concerned about rate hikes, inflation and other economic risks.
"An increasing pipeline, to us, doesn't mean an increase in IPOs is imminent," Stanford said.
SPAC Boom Impact
One factor stirring caution is the rise of SPACs. The IPO environment is still feeling the aftereffects of the 2020 and 2021 SPAC boom. Special-purpose acquisition companies provide a sort of backdoor way for companies to go public. The SPACs list their shares and then buy a private company. They avoid many of the regulatory hoops and costs required to launch an entirely new stock.
Some companies that went public via SPAC have succeeded, such as DraftKings and Vertiv. Others, like Virgin Galactic, drew attention but little success. Virgin Galactic stock topped 60 in early 2021 but trades under 2 now.
The most recent SPAC was the March 22 merger of Donald Trump's Trump Media & Technology, parent of the Truth Social app platform, into Digital Work Acquisition Corp. The new company, which launched March 26 on the Nasdaq under the ticker DJT, appears likely to be influenced by strong strains of political interest, in addition to the usual market factors.
While IPO stocks face plenty of challenges, that's even more true for SPACs.
At least 21 companies that went public via SPAC mergers went bankrupt in 2021, according to Preston Brewer, legal analyst at Bloomberg Industry Group. High-profile SPAC bankruptcies included WeWork, Bird and EV maker Lordstown Motors.
The insolvencies accounted for a loss of more than $46 billion in total equity value, based on peak market capitalizations, Brewer wrote, citing Bloomberg data.
"The SPAC bust, combined with a down market for IPOs generally, has made investors more cautious," Brewer told IBD. "There's greater emphasis on quality, including profitability, which negatively impacts IPOs as they tend to be riskier than other equities."
Outlook For Tech IPO Stocks
Chip designer Arm Holdings is a good example of a focus on quality. Arm was a spinout from Japan's Softbank, which raised nearly $5 billion by selling a minority stake to the public. Arm was largely a known quantity; before Softbank acquired it, Arm had traded as a public company. And the IPO launched straight into the teeth of the stock market's artificial intelligence bonanza.
That makes Arm stock's strong advance no great surprise.
Maplebear, parent of the Instacart grocery shopping app, is up 23% from its September IPO price. That's a healthy advance. But it followed a period of spiking and slumping, and shares remained 14% off their opening-day high as of Thursday.
That volatility is far from extreme for IPO stocks. But it's enough to leave executives and investors cautious. And it pressures valuations.
"Tech companies are stuck with few great options at the moment," Stanford said. "While the volatility may have come down in the public markets, the multiples are much smaller than where many of these companies raised their last private round."
Also, in general, valuations for IPOs like Reddit are harder to determine than for firmly established companies going public, like Arm. Volatility further complicates that challenge.
"This is going to manifest, for many, in a down valuation on their IPO. This is keeping some away from listing for the moment," Stanford said.
AI Stocks: Tech Giants, Cloud Titans, Chipmakers Battle For An Edge
The IPO Outlook for AI
Artificial intelligence will likely continue to draw plenty of interest. But Arm Holdings' success aside, AI prospects may divide in the near future, according to Stanford.
"Strong AI companies with differentiated models and use cases should see strong interest for an IPO," Stanford said. "But more broadly, enterprise tech is a much safer bet than consumer, especially when we aren't out from under clouds of a recession possibility."
Potential AI and AI-related IPO stocks for 2024 include chipmaker Cerebras, data analytics firm ThroughtSpot, AI speech and analysis firm Uniphore and payment services provider Stripe, according to PitchBook.
But the AI label on its own may be losing some cachet, with investors placing rising priority on fundamentals.
"AI-related products and services and AI-advantaged themes continue to dominate today's narrative," said Mark Schwartz, IPO and SPAC advisory leader at EY Americas. "But investors are beginning to exercise some 'show me' discipline in this area."
That wasn't the case for Astera Labs, a Santa Clara, Calif., company that supplies connectivity chips to cloud and AI data centers. Astera raced 133% above its 36 IPO price in fewer than five days, then pulled back.
Databricks, a San Francisco-based AI data firm that IPO watchers are eagerly awaiting, has been reporting its performance almost as if it were a public company. Early in March it reported it had reached $1.6 billion in revenue for the fiscal year ended in January.
Prospects For Biotech IPOs
Biotechs are typically more prone than tech companies to IPO, Bloomberg's Brewer said.
"They burn through cash, generally have a long period before they have a marketable product, and need to find financing wherever they can," he said. "Tech companies often have greater access to private capital than biotech firms, and are more likely to wait to go public."
Jordan Saxe, head of Nasdaq U.S. health care listings, expects 25 to 30 biotech companies to launch IPOs by the end of the year based on conversations with executives, Chemical & Engineering News reported in early February. At that point, the Nasdaq's total health care and biotechnology pipeline stood at around 45 companies, according to Saxe.
Eight biotech names went public in 2024 through early March. But their IPOs were relatively small, collectively raising around $1.22 billion. The largest was CG Oncology, at $380 million.
"Biotechs are on a much longer development cycle," Stanford said. "And they can't be sustained by VCs as their capital needs to expand through clinical trials."
After Reddit IPO, What IPO Stocks Are Expected?
Reddit, a social media forum based in San Francisco and founded in 2005, debuted on the New York Stock Exchange. Reddit had priced its shares at 34, valuing the company around $6.4 billion. The company had drawn a $10 billion valuation during its most recent fundraising round in August 2021.
"Reddit's IPO is an outlier, in my opinion," Brewer said. "It's a well-established social media company, but it is still losing money."
This isn't the best market environment in which to take a company public, Brewer says, "especially if the company doesn't have a track record of profits."
He added, "I expect most 'new' companies to avoid going public until conditions improve, if they can afford to wait."
The hurdles can come from many directions.
Fast-fashion retailer Shein is seeking to go public at a $90 billion valuation and is weighing London as a likely venue, the U.K.'s Daily Mail reported in late march. Shein in November confidentially filed for a U.S. IPO. But the company, founded in China and headquartered in Singapore, has faced SEC delays due to customer data concerns, allegations of third-party suppliers using forced labor, and anticompetition lawsuits.
IPOs Waiting In The Wings
Yet some companies will complete IPOs. It just remains to be seen which ones.
Klarna, the Swedish buy-now, pay-later heavyweight, is in talks with banks for a U.S. IPO sometime in the third quarter at a $20 billion value, Bloomberg reports. Klarna earned a $45.6 billion valuation while seeking funding in 2021.
Open analytics platform Databricks, digital banking group Chime and Kim Kardashian's fashion brand Skims could also make debuts this year.
Plaid CEO Zach Perret on March 3 said the financial services and network company will not go public this year after much speculation, Axios reported.
MarketWatch and Renaissance Capital data show seven IPO stocks launched for the month, as of March 28, including Reddit and Astra Labs, with three more set to launch before the end of the month.
Pitchbook's Stanford said he would not expect many new companies to test the waters. "There remains a large amount of dry powder in the private (capital) market, so it's best for new companies to continue developing during this environment," he said.
Are IPOs An Economic Indicator?
The slow pace of IPOs isn't necessarily an ominous sign for the economy. In fact, busy periods for IPO stocks often coincide with market tops.
"IPOs tend to be most popular when risk appetite in the market is highest," Brewer said. "For example, there were IPO market peaks in 1999-2000 (the Dot Com boom), 2007 (before the Great Recession), and 2020-2021 (the Covid pandemic boom), which generally do appear to coincide with S&P 500 peaks."
Stanford agrees IPO count and market tops "probably go hand-in-hand to some point." But how you calculate a top also matters, he added.
"The S&P is at an all-time high, but we are seeing very few IPOs," Stanford said. "2021 was the top in terms of private valuations."
"There are unicorns and decacorns (companies valued at more than $10 billion) on the sidelines wanting to go public in 2024, provided the market conditions are sufficiently favorable," Brewer said. "If several unicorns have successful IPOs, that could indicate a turnaround in the market."
"Over time, whether we return to more normalized IPO activity levels will depend on whether the broader markets demonstrate an enduring appetite for the non-megacaps, paving the way for more companies in varying subsectors and stages of development to tap the public markets," said Schwartz at EY Americas.
2024 IPO Forecast
"Looking forward, IPOs will need lower interest rates to substantially increase the number of deals," Brewer wrote in a January report.
Initial public offerings are typically growth stocks that can be hurt by high interest rate environments. Improving inflation data combined with Federal Reserve rate cuts could fuel optimism and bolster IPO activity, Brewer said. He believes activity will likely increase in the second half of the year, "and 2025 ought to build on that momentum."
Schwartz agrees, so long as the market narrative doesn't turn to "dramatic cuts are needed to avoid a recession."
The rest of 2024 could return to more normal IPO activity levels," albeit still well below the high water mark set in 2021, he said. EY is watching to see that valuations remain robust, volatility and recession fears remain in check, and interest rates tick down to debunk the "higher-for-longer" narrative that reemerged recently.
"It's a delicate balance," Schwartz said. The best-case outlook for new companies, he added, would be a moderate and consistent rate-cutting cycle against a backdrop of lower inflation and continued economic strength.
"The IPO market would benefit the most from a bit of a Goldilocks scenario."
You can follow Harrison Miller for more stock news and updates on X/Twitter @IBD_Harrison.
