It has been a tough, quiet year in the market for initial public stock offerings — but a surprisingly good year for stocks of recent IPOs.
Only 42 companies have gone public this year as of mid-May, according to Renaissance Capital, an IPO-focused research firm and exchange-traded fund, or ETF, manager. That’s up 27% from last year, Renaissance says. But only a small fraction of those deals actually matter to small investors with any normal tolerance for risk: Just 12 of 35 deals since March 1 have raised more than $20 million, making the smaller companies low-capitalization, high-volatility investments.
“It’s really tied to interest rates,” says Ted Mortonson, technology strategist at Milwaukee-based brokerage Robert W. Baird & Co. “We’re in a transition from 2020 or 2021, where huge losses were tolerated [in young companies]. You have to show that you have cash flow. But there’s a desire to look at all these next-generation companies, regardless of the economic cycle, in a new light.”
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Translation: If interest rates drop in the second half, indicating a lessening of inflation worries and growing confidence that any recession will be brief, that may begin to pry open the window for IPOs, Mortonson said.
But not yet. Of the $6.7 billion raised in IPOs so far this year, according to Renaissance, more than half came from only one deal. The companies that have come out are a diverse lot, and not as focused on the technology startup sector as popular wisdom about IPOs often assumes.
They include Kenvue Inc. (ticker: KVUE), a spinoff that owns the consumer products division of Johnson & Johnson (JNJ), which includes familiar brands such as Tylenol and Neutrogena. Kenvue raised $3.8 billion by itself. Another is Ares Acquisition Corp. II (AACT), a blank-check company organized by executives of private equity firm Ares Management, which raised $500 million to acquire or merge with a company that hasn’t been chosen yet.
Ares Management’s core private-equity industries are health care, services, industrials and consumers, according to Ares Acquisition’s IPO filings.
The year’s other largest deals include Los Angeles-based drug developer Acelyrin Inc. (SLRN), which raised $540 million to develop an anti-arthritis drug and other products; Nextracker Inc. (NXT), which raised $638 million to build software for solar power projects; and diabetes-drug developer Structure Therapeutics Inc. (GPCR), with a $161 million IPO.
The reason the IPO market is quiet is simple: They are high-risk deals, and tend to slow down sharply in skittish markets. The big decline in tech stocks in 2022, which has still not nearly been erased despite gains this year, reduces interest in young companies. The same thing happened in the 2001 and 2008 recessions, and it periodically happens even in good times.
“There’s a desire to look at all these next-generation companies, regardless of the economic cycle, in a new light.” – Ted Mortonson, technology strategist, Robert W. Baird & Co.
“We’ve been through this road before,” Mortonson said.
Of the 22 completed deals since March 20, 13 now trade below their offering price, according to Renaissance Capital. Most are lower-profile businesses based in Asia.
Other still-recent IPOs are doing pretty well. Renaissance Capital’s IPO Index, which includes IPOs up to three years old, is up 18.9% for the 12 months ending in mid-May, compared with an 8.2% gain for the S&P 500 benchmark stock index. Top members of the IPO Index include cloud data-management leader Snowflake Inc. (SNOW), which went public in 2020, lodging marketplace Airbnb Inc. (ABNB) and food-delivery service DoorDash Inc. (DASH).
The trick with IPOs is that the best deals dominate returns — so it’s important to pick them carefully. With startups, one key is to look for companies that either recently turned profitable or have positive cash flow with accounting profits coming soon, Mortonson says.
Here’s a look at some deals expected this year, as well as two stocks that represent the cream of the early-2023 IPO crop as revealed by aftermarket trading:
| Upcoming IPO | Potential 2023 IPO valuation |
| Instacart Inc. | $10 billion |
| Chime Financial Inc. | $25 billion |
| Arm Ltd. | $50 billion |
| Stripe Inc. | $55 billion |
| Reddit Inc. | $10 billion |
Instacart Inc.
The grocery delivery service put off plans to go public in 2022, even as its revenues reportedly climbed more than 50% to about $2.5 billion. (Like most startups, Instacart doesn’t release financials, but partial numbers often leak — in this case, to the Wall Street Journal).
That would be a sign that Instacart is more than a short-term habit customers adopted to get through the COVID-19 pandemic — but the performance of fellow COVID winner DoorDash could give investors pause. DoorDash is down more than 60% since its late-2020 IPO.
Instacart’s value has been pegged at about $10 billion. Based on DoorDash’s over $25 billion market cap on about $7.2 billion of revenue in the last 12 months, the price-to-sales ratio points to a price for Instacart closer to $8 billion.
Instacart could go higher if stocks rise later this year, or if its disclosures show it’s more profitable than DoorDash, which made $511 million before taxes and non-cash charges in the year that ended March 31. Either way, it’s a big step down from the $38.7 billion valuation Instacart commanded in a 2021 venture-financing round.
Chime Financial Inc.
This online bank targeting young-adult customers was expected to go public last year at a valuation approaching $25 billion, but it delayed its IPO move in a down market. Fintech stocks have bounced back hard this year, with the Ark Fintech Innovation ETF (ARKF) up more than 30% year to date as of May 26, making a debut by fall more plausible for Chime.
Chime will have to distinguish itself, though, from the similar app-based bank SoFi Technologies Inc. (SOFI), whose market cap is only $5.4 billion despite a 772% jump in SoFi’s first-quarter earnings before interest, taxes and non-cash charges, to $75.7 million.
Watch the resolution of the debt-ceiling standoff to see if sentiment improves enough for Chime to reach a higher valuation. Ultimately, its issue will be persuading Wall Street to value it as a fast-growing tech company with a high price-to-earnings multiple rather than as a bank, which doesn’t command the same market premium.
Arm Ltd.
The British chip designer is expected to try to go public as soon as September, Bloomberg reports. Three reasons: Chip stocks are up this year after a tough 2022, when Arm delayed an IPO bid; the U.S. is pouring incentives into chip manufacturing, improving sentiment; and Arm’s backers at Softbank Capital badly need a big win to shore up their recent venture capital returns.
Softbank would reportedly like Arm to raise $10 billion in a public offering in exchange for a still-undisclosed stake. In September 2020, gaming-chip giant Nvidia Corp. (NVDA) offered $40 billion of stock for the company, which Softbank bought for $32 billion in 2016. Chip-stock indexes are higher than they were then, but below the late-2021 peak. Nvidia’s bid fell apart after antitrust regulators objected, so a spinoff of Arm is likely.
“Arm is real,” Mortonson says, arguing that its products put it in the forefront of efforts to develop artificial intelligence technology. Giants like Amazon and Apple use products like Arm’s in developing their own AI-based products and services, he says. “It’s a sea change in technology, one you see every couple of decades.”
Stripe Inc.
Stripe reportedly had $14.4 billion in 2022 revenue — enough to make the online payment processing firm a prime IPO candidate. Indeed, estimates have put its value as high as $55 billion. But that is down from $95 billion in 2021, as its recent fundraising has mirrored the decline in value of publicly traded technology stocks.
It also may reflect the fact that Stripe’s revenue growth slowed last year. The company said in an April 5 letter to investors that it should benefit from a boost in small business formation during the pandemic, which expands its base of potential customers, and from the spread of artificial intelligence technology, which gives Stripe both new customer prospects and options to improve its product suite.
If it goes forward, its price will likely be set in negotiations with big institutions who have been buying Stripe’s private deals all along, Mortonson says.
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Reddit Inc.
The social news aggregation and discussion website had $510 million in revenue in 2022, benefiting from the secular growth of online advertising, according to research firm Sacra, justifying a valuation as high as $10 billion.
That would be several times higher than revenue multiples for Alphabet Inc.’s (GOOG, GOOGL) Google and Meta Platforms’ (META) Facebook, which dominate the online ad market, a gap that could be accounted for by Reddit’s much higher growth rate. If the market believes Reddit can sustain this pace, a $10 billion valuation could make sense. If not, the numbers will likely move lower.
“The profitability or free cash flow will determine the valuation,” Mortonson says, because confidence in online advertising growth isn’t high enough to support unprofitable companies’ IPOs. “They’re going to have to make money.”
2023 IPO Performance Highlights
Kenvue Inc. (KVUE)
Kenvue stock got a boost following its IPO in early May, partly reflecting its rapid introduction of new products that make up about 10% of its $15 billion in annual sales, CEO Thibaut Mongon told CNBC. Mostly, though, Kenvue is a milk-the-cow strategy, with solid profits and modest sales growth: Revenue climbed only 4% in fiscal 2022, as the company earned $2 billion.
“In the years to come, we are going to continue to do what we do best, which is innovating to find new ways to serve consumers and help them take better care of their health,” Mongon told CNBC.
Kenvue had a closing price of $26.30 on May 26, up from its $22 IPO price.
Nextracker Inc. (NXT)
This company makes technology that lets solar power plants track movement of the sun, tilting panels to maximize the plant’s exposure to electricity-generating rays. It may stand to get a boost from the extension of tax credits for solar plant builders and operators under last year’s Inflation Reduction Act, and it made $50 million on $1.5 billion of revenue last fiscal year, as sales rose 22%.
Shares are up to $39.14 as of May 26, compared with their $24 IPO price. That’s a 63% gain.
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7 Recent and Upcoming IPOs to Watch in 2023 originally appeared on usnews.com
Update 05/30/23: This story was previously published at an earlier date and has been updated with new information.
