The stock market downturn since the start of the year has led to the longest drought in US tech listings this century, with experts cautious about the pace of a rebound, even after tentative signs of life in other sectors.
Wednesday will be 238 days without a tech IPO worth more than $50 million, surpassing previous records set in the wake of the 2008 financial crisis and the dotcom crash of the early 2000s, according to research by Morgan Stanley’s technology equity capital markets team.
The US stock market has been rocked this year by the Federal Reserve’s struggle to curb inflation through aggressive rate hikes. Higher interest rates affect the valuation of stocks by lowering the value of future earnings, and have fueled fears that the economy will be pushed into recession.
Fast-growing technology stocks dominated last year’s record-breaking IPO market, posting some of the biggest gains during the stock market boom, but they were also disproportionately hit by this year’s sell-off.
The tech-dominated Nasdaq Composite is down nearly 28 percent so far this year, compared to a drop of just over 19 percent in the S&P 500, while the Renaissance IPO index, which tracks U.S. companies that have been on the rise for the past two years. listed on the stock market, fell more than 45 percent.
“There is a tremendous amount of uncertainty in the market right now, and uncertainty is the enemy of the IPO market,” said Matt Walsh, head of tech equity capital markets at SVB Securities.
“I think we should see some stabilization in the outlook and investors will step back to buy existing public securities before they are willing to go further up the risk curve and buy technical IPOs.”
Life insurer Corebridge last week completed its first $1 billion US IPO since January, and its cautious early receipt highlighted investors’ caution, even for more established and profitable companies.
Even after the Corebridge deal, total U.S. IPO volumes are down 94 percent year over year, with just $7 billion raised so far in 2022 compared to $110 billion in the same period last year, according to data from Dealogic.
Corebridge was closely watched as a sign of investors’ hunger for more deals. But Nicole Brookshire, a partner at law firm Davis Polk who specializes in technical quotations, said other factors, such as weak earnings reports, could have “a bigger impact” on the outlook for new technology publishers.
“In some companies and sectors, guidance has deteriorated [and] many companies are feeling the effects of macroeconomic headwinds and that affects valuations,” she said.
IT groups in the S&P 500 nearly met second-quarter earnings expectations, according to FactSet, but third-quarter forecasts have been repeatedly revised downwards, with earnings now projected to fall 4 percent year-on-year.
Many tech groups have responded to the downturn by placing greater emphasis on cost savings and progress toward profitability, but Brookshire said companies need time to show the changes are working.
“Last year there was little discussion about profitability [among IPO candidates]. Now there is more, but the problem with shifting the focus from a growth story to a profit story is that it takes time for issuers to prove their progress.”
A more positive factor prolonging the drought, Walsh of the SVB added, is the fact that tech companies raised so much private capital before the recession that “there isn’t the same sense of urgency.” He said he expected “a small group” of companies would still attempt to list this year, but said most had already pushed back plans to 2023.
#Market #slump #longest #tech #IPO #drought #years