Has the Tech IPO Market Reached Its Peak?

The year 2021 witnessed a significant spike in technology stocks and offered investors abundant opportunities. The Nasdaq Composite surged up to 30% as we approach the midyear point, marking this period as an excellent time to invest in tech stocks. However, this rampant bullish trend may come to an end sooner than anticipated.

In 2022, the Federal Reserve’s gradual increase in interest rates has had the most significant impact on tech highfliers, both public and private. The value of future earnings has decreased intrinsically, making them suffer huge losses. However, with the Fed almost done with raising rates, there might be a slight chance for a few tech IPOs before the year ends.

Last year’s advent of ChatGPT by OpenAI was another valuable addition to tech that sparked investor interest in generative artificial intelligence strategies. Consequently, this interest drove massive gains across the market’s leading technology stocks. Market giants such as Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon.com (AMZN), Nvidia (NVDA), Tesla (TSLA), Meta Platforms (FB), Taiwan Semiconductor (TSM), Broadcom (AVGO), and Oracle (ORCL) – have been major beneficiaries of this interest, collectively averaging a 76% gain.

Though it appears to be a roaring tech Bull market, investors might have to brace themselves for an expected slowdown in growth.

The Potential for AI Start-ups to Reopen the IPO Window

The intersection of demand for AI stocks and the supply of AI start-ups could lead to the reopening of the IPO window, driven by investors seeking new ways to invest in AI.

There are already over a dozen venture-backed generative AI unicorns, including OpenAI, Anthropic, Cohere, and Hugging Face. These companies are all valued at over $1 billion, proving that AI is an industry with great potential.

Despite the promising outlook, the road to an IPO for most AI software companies is not as straightforward as it may seem. According to Lise Buyer, founder and managing partner of Class V Group, companies need to demonstrate more than just hope and a good story to be successful.

While OpenAI could likely go public tomorrow, others will need to show tangible results before institutional investors are willing to invest. Investors are no longer willing to be the “greater fool” and are more interested in established companies such as Microsoft, Alphabet, and Nvidia.

Although the potential for AI start-ups to reopen the IPO window exists, it will require more effort and tangible results from AI companies before institutional investors take notice.

The Risk of AI Companies Going Public

Some investors think that AI companies are not yet ready to go public. David Hornik, founder of venture firm Lobby Capital and an early investor in several companies including Fastly and Splunk, believes that revenue is what talks in the stock market. According to him, only a few AI companies like OpenAI might have the revenue to support an IPO. Others, however, will only have their stories without tangible earnings. He also adds that any rush to take AI firms public is so outdated.

Matt Kennedy, senior IPO market strategist, explains that institutional investors who focus on IPOs require an established business model, a path to profitability, and at least $100 million in revenue. While OpenAI might meet these criteria, it already has a deep-pocketed investor in Microsoft that has placed a significant bet on the potential of generative AI. For Kennedy, VCs are showering AI companies with capital. So, why go public?

Companies Are Hesitant to Go Public Despite Appetite for IPOs

As the pandemic begins to wane and the economy improves, there seems to be an appetite for more initial public offerings (IPOs), but many potential issuers are feeling uncertain.

While there have been some successful IPOs, like that of restaurant company CAVA Group, which doubled on its first day of trading, and a few enterprise software companies with AI-like offerings, the pure gen-AI plays may be further from an IPO.

For instance, the pending IPO for Arm Holdings, which is being spun off by parent SoftBank Group, is highly anticipated, but the chip-design firm may be tricky to value because it generates licensing and royalty revenue rather than selling components. There are no effective comparisons in the public market.

Despite buyer appetite, a senior tech banker at one of the biggest players in the IPO market notes that potential issuers are hesitant to go public. Many companies could potentially go public during this time, but it seems that they are playing it safe for now.

The Current State of Tech IPOs

As the economy potentially slows down and private-market valuations take a hit, start-up leaders are hesitant to go public. Many of the highest-valued unicorns raised money last year when valuations were much higher, which leaves some companies in a difficult position.

Those without an immediate need for cash can afford to wait until conditions are more favorable for their IPO. Meanwhile, the companies that need the cash are the least attractive to potential investors.

A banker concludes that we may see a couple of major tech IPOs, such as Arm, later in the year. However, most tech companies will likely have to wait until 2024 to go public.

The hesitation to go public is understandable considering the current economic climate. Investors are less likely to take risks, which can be a disadvantage for companies in need of cash. However, with proper planning and strategy, going public can still be a viable option for tech start-ups in the future.

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