The Great IPO Reopening is facing a setback due to rising rates and lower stocks, which can be detrimental to IPO success.
A combination of high valuations, underwhelming performance of recent IPOs, and poor market conditions may lead to the postponement of The Great IPO Reopening.
Instacart fell below its initial price of $30 before closing at $30.65 on Thursday. Similarly, Arm Holdings dropped below its initial price of $51 before closing at $52.
Klaviyo opened at $31.30 on Thursday, slightly above its initial price of $30, before closing at nearly $34.
The earlier batch of IPOs doesn’t fare much better. Take the example of Cava, a restaurant chain that generated excitement when it debuted in June. Starting at $22, its price soared to $42 and even reached $55 briefly. Currently, it stands at $30, still above its initial price but affected by heavy selling in the past two weeks.
Kenvue, the spinoff of Johnson & Johnson, went public in May at $22, traded in the high $20s for a couple of months, and has since fallen below its initial price.
Oddity Tech, a cosmetics firm, priced its IPO at $35 in July, opened at around $49, and is currently at $28, below its $32 initial price.
Adding to the concerns are seasonal weaknesses and macroeconomic worries, particularly higher interest rates, which are causing anxiety among IPO hopefuls looking to go public in October or November.
Unfortunately, the alternatives do not present attractive options.
Bad news overshadows the good
The good news is that deals are being made.
The bad news is that these early companies are the strong ones, and their lukewarm reception, despite having small floats, does not bode well for the numerous tech IPO hopefuls, many of whom are unprofitable and want to avoid significant losses in the public markets.
Earlier this week, I highlighted the consensus that a successful IPO candidate must either be profitable or on a clear path to profitability and have a lower valuation.
Unfortunately, some of these tech unicorns are likely to decline the idea of going public at substantially lower valuations. According to Nizar Tarhuni, Vice President of Research at Pitchbook, there are approximately 800 tech unicorns that have not raised capital for an average of more than 17 months.
“They will need to raise funds soon, but the pricing dynamics don’t look promising,” Tarhuni reported.
These unicorns are left with three options: 1) raise more capital in the private markets, 2) pursue mergers or acquisitions, or 3) enter the public markets.
Tarhuni highlighted that venture capital firms still have resources, but they will focus on supporting companies with the highest chance of success, which usually means those already generating operating profits.
What about the rest? Those that do not meet the criteria for a successful IPO and cannot secure additional private capital will be compelled to merge or be bought out. This presents potential opportunities for distressed M&A firms.
A smaller percentage will decide to brave the public markets (some may choose the SPAC route) but will need to accept lower valuations.
The real IPO killer: macro outlook
This month, the 10-year yield has risen from 4.10% to 4.48%, a nearly 40 basis point increase. The S&P 500 has declined by 2.7% in September.
This combination of surging interest rates and a bearish stock market is the classic recipe for IPO failures.
This unfortunate circumstance coincides with the upcoming wave of IPO hopefuls planning to debut in mid-October.
Hopefully, interest rates will stabilize and stocks will recover from the seasonal weakness of September and October.
However, if the 10-year yield surges another 40 basis points (reaching 5%) and the S&P 500 drops by an additional 2.5% to 5% or more, many of these IPO hopefuls will likely postpone their plans.
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