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5 Signs of an IPO Comeback A Glimpse into the Resurgence of IPOs

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A Healthy IPO Market is a Sign of Market Health

A healthy Initial Public Offering (IPO) benefits the stock market and investors for several reasons. Firstly, it signifies a robust and dynamic economy, as it shows companies have confidence in business prospects and the future. For investors, a thriving IPO market opens up the door to fresh investment opportunities and allows the public to participate in the most innovative and fastest-growing companies.

The Disappointing Decline of the IPO Market

Rock-bottom interest rates, a rebounding market, resumption of business activity, and a raging post-COVID bull market were the cocktail needed to generate the all-time record for IPOS in 2021. However, since the spat of new public issues in 2021, the number of newly minted IPOs is on a disappointing trajectory. In 2022, there were only 181 IPOs, and last year, the IPO market was feeble, producing just 154 IPOs. Three key reasons behind the slowdown are:

The SPAC Bubble

A Special Purpose Acquisition Company (SPAC) is a publicly traded company created with the sole purpose of raising funds through an IPO. It acquires or merges with an existing private company, effectively taking it public. In 2020, a post-pandemic bull market coupled with the β€œmeme” stock craze set off a frenzy of SPAC IPOs. However, most SPACs, such as Virgin Galactic (SPCE), were highly speculative and unprofitable. As many SPACs fell 80% or more off highs, many companies wanting to go public decided to change their minds.

Zacks Investment Research
Image Source: Zacks Investment Research

Private Raises

After witnessing the IPO debacles of 2020, many companies decided to raise capital privately, decreasing the number of companies that went public.

Market Volatility

Companies that IPO want to be successful. However, in a volatile, bear market, even the best stocks can be dragged down by a poor equity and economic environment.

Despite the dismal performance of IPOs recently, there are five signs that the IPO market will return with a vengeance in 2024, including:

Psychology Shift & β€œThe Snowballing Effect”

Management teams often wait for other companies to test the IPO waters before taking the plunge themselves. With that said, recent IPOs are beginning to make a splash, including restaurant operator Cava Group (CAVA), solar stock Nextracker (NXT), and most notably, semiconductor firm Arm Holdings (ARM). Β Thursday, ARM skyrocketed nearly 50% for the session after delivering blockbuster earnings and a rosy outlook.

Zacks Investment Research
Image Source: Zacks Investment Research

The robust performance, coupled with the diverse set of industries doing well in the current IPO market, should spur prospective IPO management team confidence and set off a potential IPO snowballing effect.

SPAC Wounds are Healing

Time is the ultimate healer. As time passes, markets and investors will begin to forget about the SPAC failures, and a fresh batch of IPOs should emerge.

Lower Interest Rates Loom

There is a more than 60% chance that the Federal Reserve will cut interest rates in May and a 92% chance they will cut them in June, according to the CME Fedwatch tool. Lower interest rates are advantageous for companies’ intent on going public because they reduce the cost of borrowing and make raising capital more accesible. This cost reduction can enhance a company’s financial position, potentially improving profitability and valuation metrics making the company far more attractive to investors in the public market.

Volatility has Dissipated: More Visibility

The economy was very unstable before the start of 2024 and last year. Inflation was at forty-year highs, interest rates were soaring, geopolitical turmoil was boiling, and equity markets were plummeting.

A Robust and Diverse IPO Pipeline is in Store for 2024

Several industry titans are rumored to IPO in 2024, such as social media juggernaut Reddit, payment giant Stripe, stablecoin operator Circle, and Elon Musk’s wildly successful SpaceX. Each of these companies is a leader in their respective industry, generate massive revenues, and will garner a ton of attention from Wall Street.

Bottom Line

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