Is an IPO possible? Forbes analyzes key factors in the IPO market and igniting investor enthusiasm

The Nasdaq index, which is mainly composed of technology stocks in the United States, has risen by 22% year-to-date. Such a strong tech stock market should mean that people need to buy more stocks of fast-growing companies that are changing the world. But why has the IPO market been so lukewarm in recent years? A Forbes column points out that investors are looking for IPOs that can outperform the market in the long term, and since the launch of ChatGPT in November 2022, there hasn't been a fast-growing AI company that has gone public.

Overview of the Initial Public Offering (IPO) Market

Since 2021, the initial public offering (IPO) market has nearly come to a halt. Hopes of the IPO market returning to the robust levels seen in 2021, let alone the record levels during the dot-com boom, seem bleak.

The IPO market reached its peak during the dot-com bubble era. A plethora of startups rapidly grew to meet the demand for a range of products and services to support the rise of e-commerce. When the long-term stock performance post-IPO turned negative, the boom turned into a bust.

According to research by University of Florida Professor Jay Ritter, from 1995 (the IPO of web browser supplier Netscape) to 2000, there were a total of 2,469 IPOs that raised $266 billion.

Between 1995 and 1998, the average three-year return for IPOs was 33.8%. However, during the dot-com era in 1999 and 2000, the return rates plummeted to -48% and -60%, respectively.

The period from 2022 to the first half of 2024 has been challenging for IPOs. According to Ritter's research and Renaissance Capital's 2024 Q2 US IPO Market Quarterly Review, during this period, 131 IPOs raised a relatively modest $28 billion.

Importance of IPOs

The IPO market is crucial for startups as an active IPO market enables venture capitalists to demonstrate to pension funds, endowments, and other institutions that investing in startups can yield attractive returns. It also serves as a vital source of funding for startups to expand their operations.

Without an IPO market, venture capitalists would advise their portfolio companies to seek new capital elsewhere. A survey in 2022 by Statista found that 47% of startup owners cited a lack of funding as leading to bankruptcy.

Reviving the IPO Market

For an active IPO market to exist, investors who purchase shares in companies after they go public must see high returns. This occurs when a public company grows at a double-digit high rate and can sustain this rapid growth post-IPO.

Some experts attribute the recent decline in the IPO market to the collapse of special purpose acquisition companies (SPACs), geopolitical uncertainties, and high-interest rates.

However, Forbes columnist Peter Cohan argues:

Investors are looking for IPOs that outperform the market averages in the long run. This happens only when public companies can sustain a growth rate faster than what investors expect.

Nvidia, a recent high-flyer, saw its revenue grow by 262% in the last quarter with a net profit margin of 57.1%. Its stock price has surged by 160% year-to-date. IPO markets won't revive unless companies can match their growth rates and returns with early-stage high risks.

The author suggests that a wave of successful generative AI IPOs could revive the market. These companies may include suppliers of AI chips, networking technologies, data centers, large language models, and generative AI applications. If they go public and maintain rapid growth, more capital will flow into generative AI startups, potentially paralleling the prosperity of the dot-com era.

However, according to Techopedia, among the 12 potential IPOs planned for 2024, only one originates from the academic and open-source community, the US software company Databricks.

2024 IPO Landscape

According to EY's Q1 Global IPO Trends Report, this year started with a "cautiously optimistic tone," with 287 transactions completed, raising $23.7 billion.

When Reddit, the US version of the PTT forum, made its debut on the New York Stock Exchange in March, its stock price soared, maintaining a 57% increase to date.

IPO Revival! Reddit's stock price surges after going public, making millions for whitelist veterans

Financial trading platform eToro, stablecoin issuer Circle, and Telegram are reportedly considering IPOs in the US in the near future.

However, with the outstanding performance of tech giants this year, IPO stocks with higher relative risks must provide superior performance and returns compared to tech giants, which should also be a significant consideration for investors.

For startups, not going public during the economic recovery and the influx of hot money means waiting for several years. Moreover, with interest rates at highs and borrowing costs prohibitive, an IPO seems like a worthwhile option!