A few weeks ago, I came up with an ingenious hypothesis about the initial public offering market.
Hear me out, and then I’ll explain why everyone told me I was crazy—and why the tech IPO window might open, but only a crack, before the end of the year.
This has been a fantastic year to invest in technology stocks. The Nasdaq Composite is up...
Software maker Canva is already worth an estimated $40 billion, but, like other tech unicorns, its IPO could still be a while away.
Brent Lewin/Bloomberg
A few weeks ago, I came up with an ingenious hypothesis about the initial public offering market.
Hear me out, and then I’ll explain why everyone told me I was crazy—and why the tech IPO window might open, but only a crack, before the end of the year.
This has been a fantastic year to invest in technology stocks. The Nasdaq Composite is up 30% as we near the midyear mark. After the Nasdaq tumbled 33% last year, investors flocked back to tech stocks, for multiple reasons.
Throughout 2022, the Federal Reserve steadily ratcheted up interest rates, effectively reducing the value of future earnings, damaging tech highfliers, both public and private. But the Fed appears nearly done.
Meanwhile, the introduction last year of ChatGPT by OpenAI—just over 200 days ago—has triggered a frenzy of investor interest in generative artificial-intelligence plays, driving huge gains across the market’s largest technology stocks. Apple (ticker: AAPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon.com (AMZN), Nvidia (NVDA), Tesla (TSLA), Meta Platforms (FB), Taiwan Semiconductor (TSM), Broadcom (AVGO), and Oracle (ORCL)—the 10 largest U.S.-listed tech companies by market value—have an average gain of 76%. Sounds like a raging tech bull market, don’t you think?
And here’s the other key ingredient. There are already more than a dozen venture-backed generative AI unicorns—private companies with valuations north of $1 billion. That includes large-language model developers such as OpenAI, Anthropic, and Cohere, and the open-source model provider Hugging Face.
My hypothesis: When you combine demand (for AI stocks) and supply (of AI start-ups), you have a perfect recipe for reopening the IPO window, all driven by investor thirst for new plays on AI, which some people think is the most important development since the internet, cloud computing, or the iPhone. Or the horseless carriage. Or the wheel.
A no-brainer, right? Well, no.
I ran my thinking past Lise Buyer, founder and managing partner of Class V Group, a consultancy focused on guiding companies through the IPO process. She simply isn’t buying it.
“Most AI software companies don’t have enough there yet to go public,” Buyer says. “If this were 2021, companies with hope and a good story could go. Today, it takes more than that. Public-market investors have no interest in being the greater fool. They can ride the AI wave with Microsoft, Alphabet, and Nvidia. Other than OpenAI, which could probably go tomorrow, others will have to show something very tangible before the institutional investors dive in.”
Undaunted, I tried out my idea on David Hornik, founder of venture firm Lobby Capital and an early investor in Bill.com , Fastly , GitLab, and Splunk, among others. Turns out, David is blunter than Lise. “No, I don’t think that the AI companies will jump in line,” Hornik told me. “The Street has learned that lesson. Revenue talks and bulls—t walks. So, yeah, OpenAI might have the revenue to support an IPO. And they should run to Nasdaq. But no one else will have anything but a story.” He says any rush to take AI firms public “is so 1997...at least I hope.”
Matt Kennedy, senior IPO market strategist at Renaissance Capital, which runs the Renaissance IPO ETF, says institutional investors focused on IPOs want to see an established business model, a path to profitability, and at last $100 million in revenue. OpenAI is the only company in the AI group that might meet those criteria, but it also has a deep-pocketed investor in Microsoft that has basically bet the company on the future of generative AI.
Says Kennedy: “Why go public when VCs are showering you with capital?”
There are a few glimmers of hope. The strong early performance of this month’s IPO of restaurant company CAVA Group (CAVA), which doubled on the first day of trading, is encouraging. And, as Kennedy notes, there are a handful of enterprise software companies that give off AI vibes, which could be a lot closer to an IPO than the pure gen-AI plays. He points to Databricks, a cloud-based data warehouse company that competes with
There’s growing anticipation on the Street about the pending IPO—possibly this fall—for the chip-design firm Arm Holdings, which is being spun off by parent SoftBank Group (SFTBY). But Arm is going to be tricky to value—it doesn’t make or sell components; it generates licensing and royalty revenue from other chip companies. There are no effective comparisons in the public market.
I talked to a senior tech banker at one of the biggest players in the IPO market, who told me there might be buyer appetite for IPOs, but potential issuers are feeling gun-shy. “We could take a lot of companies public right now,” he says.
For now, though, start-up leaders are balking, he says, because they’re troubled by a potentially slowing economy and the need to likely take haircuts on recent private-market valuations. Some of the highest-valuation unicorns raised money in 2021, when valuations were a lot higher. Companies with no great need for cash can simply wait to go public. Meanwhile, the companies that do need the cash are the ones least likely to be attractive to IPO investors.
The banker’s conclusion: We might get Arm and a couple of others in the back half of the year. But most tech IPOs will have to wait for 2024.
Write to Eric J. Savitz at eric.savitz@barrons.com