What Happened To The IPO Market?

What Happened To The Ipo Market?

Nobody wants to go public anymore.

After a roaring 2021 initial public offering (IPO) market, featuring boldface names like Rivian and Robinhood, private companies are staying private in 2022 since investor risk appetite for new issues has vanished.

“When the stock market is down, people have less of an appetite for IPOs,” said James Angel, faculty affiliate at Georgetown University. “It’s not a surprise investors are thinking twice about speculative ideas.”

Investors have gone from hungry for new stocks to downright jumpy. There were 1,035 IPOs in 2021, per Stockanalysis.com, by far the most for any year in the 21st century and following a robust 2020, as well. In 2022, though, there have been just 161 IPOs so far this year, the fewest since 2016.

What’s going on? And when will optimism return? Here’s what you need to know.

Depressed Markets Uninterested in IPOs

It’s tough to go public when the demand for stocks overall is so abysmal. Who wants to jump aboard a sinking ship?

The S&P 500 is down 24% so far this year, as of this writing, which would represent the benchmark index’s worst year since 2008. Stocks have spent most of 2022 deep in the red after the Federal Reserve made it clear that it would focus solely on wringing sky-high inflation out of the economy.

To that end, the Fed has pushed interest rates dramatically higher and lowered its massive balance sheet, which has caused Wall Street, which loves cheap money, to hide in its shell and cry, “Mercy.”

The bad news likely won’t relent anytime soon, as recent inflation reports show that high prices are sticking around longer than anyone wants.

“Inflation was slightly higher than expected in August, keeping the Fed on course for further aggressive rate hikes near-term,” said Bill Adams, chief economist for Comerica Bank.

The picture for IPOs, though, is even grimer than that.

One way to divide up the world of stock is between growth and value. Growth stocks‘ best days are ahead of them, while value stocks are established names that are on sale, offering the promise of solid profits and steady dividends.

Growth stocks had been on a tear before 2022, up 36% in 2019, 38% in 2020 and 27% last year. These high-flyers have crashed back to earth this year, falling by 30% in 2022 so far. Longer-in-the-tooth value stocks, on the other hand, have declined by just 16% this year.

With investors seeking safer stocks, it’s no wonder that IPOs are happening less often.

Bad Performance by Recent IPOs

Another headwind is the poor performance of recent IPOs. After all, investors want to buy the new thing because they believe it’ll jump in value, and they want in on the ground floor.

If new public companies struggle, even after selling themselves to institutional and average investors for months, then the appetite for more IPOs will likely be muted.

Take Rivian, the electric truck company many analysts believe could be the next Tesla, Inc. (TSLA). Rivian has gone from a market cap north of $100 billion after its November 2021 IPO to being worth around $30 billion just 10 months later, for a nearly 70% decline in 2022 alone.

What happened? Production delays and high inflation have hurt the bottom line, driving huge quarterly losses and a round of layoffs. Not exactly the growth story being sold last Thanksgiving.

Robinhood is another cautionary tale. The online brokerage captured headlines in early 2021 as the meme stock debacle captivated the investing world. There’s been no confetti since mid 2021, and the trading platform’s price has dropped by nearly 80% over the past year.

These aren’t isolated incidents. Fintech darling SoFi is down big, along with Warby Parker. With so many high profile disappointments and disasters, a corresponding pullback is all but inevitable.

A booming market caused another problem: it pulled forward a bunch of companies who were considering going public given the right market environment.

“If the IPO window is open you want to jump through it if you possibly can,” said Angel, “because you know that the window will eventually close.”

Toss in the speculative SPAC market boom, which has also seen huge losses, and many companies that may have considered going public in 2022 took their chance when the getting was good.

When Will the IPO Market Return to Normal?

There are some companies sitting on the sidelines, including fintech giant Stripe. Once valued at $95 billion, Stripe recently lowered its valuation to $74, a stunning 28% drop in value.

Meanwhile, buy-now-pay-later giant Klarna saw its valuation drop by 85% as investor appetite for non-bank lenders has seemingly dried up.

Both have been said to be considering IPOs for a while now, but there’s little sense of when that may actually happen.

The IPO market will rebound once demand for equities overall improves and investors get excited about a prospectively tech breakthrough. In the past that has been electric vehicles, fintech products or online retailers, like Warby Parker.

“I’m not sure what the next innovation will be,” said Angel. “But sooner or later another thing will happen, and we’ll get another boom.”

Starry-eyed traders will have to satisfy themselves with boring fare like Exxon Mobil until animal spirits rebound.


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