# Navigating the IPO Landscape in 2024: Challenges, Opportunities, and AI-Themed IPOs
As we venture into 2024, the IPO market stands at a crossroads, mirroring the closing trend of 2023. While a market rally and optimism surrounding artificial intelligence (AI)-themed IPOs offer glimmers of hope, the valuation overhang and the threat of valuation haircuts cast shadows of uncertainty. Understanding the current market dynamics and challenges is crucial for companies contemplating an IPO in the year ahead.
Current Market Dynamics and IPO Sentiment
The IPO market in 2024 mirrors the closing trend of 2023, characterized by glimmers of hope stemming from a market rally and unwavering optimism surrounding the potential emergence of artificial intelligence (AI)-themed IPOs later in the year. While stock markets have reached new highs and interest rates have witnessed a downward trend, the initial public offering (IPO) filings have been relatively modest, leaving room for cautious optimism regarding an upswing in the IPO calendar.
Senior Strategist Matt Kennedy of Renaissance Capital expresses cautious enthusiasm, acknowledging the encouraging filing activity while acknowledging the market’s impact on overall sentiment. The S&P 500, despite a strong close to 2023, has only gained marginally over 1% for the year, reaching a new high. However, the primary exchange-traded fund focused on IPOs, the Renaissance Capital IPO ETF (IPO), has performed poorly, facing declines for most of the month.
Modest ETF Performance and Notable IPOs
Despite the overall muted sentiment, a few modest ETFs have shown positive performance in the early weeks of January. Kaspi (KSPI), a Kazakhstan-based super app offering online banking and e-commerce services, initiated trading on the Nasdaq, raising over $1 billion through the sale of 11.3 million American Depositary Shares (ADS) at $92 per share. The stock closed with a 4% gain on its first trading day.
Homebuilder Smith Douglas also made its debut on January 11, offering 7.7 million shares at $21 each, resulting in a market capitalization of $1.1 billion. Since then, the stock has experienced a 15% increase. However, the absence of significant IPOs since Birkenstock’s listing in early October 2023 has left investors desiring more substantial deals.
Pending IPOs and Ongoing Valuation Challenges
Despite the slow start to the year, several companies have filed for IPOs, signaling potential activity in the coming months. BrightSpring Health, a provider of home and community-based healthcare services, plans to commence trading on the Nasdaq this Friday. The company aims to raise approximately $880 million by offering 53.3 million shares within a price range of $15 to $18, valuing the company at $3.4 billion at the midpoint of the range.
Amer Sports, a renowned international sports brand owner encompassing Arc’teryx, Salomon, Wilson, Atomic, and Peak Performance, among others, is set to begin its roadshow, offering 100 million shares at a price range of $16.00 to $18.00. Assuming the midpoint of the range, the company expects to raise $1.7 billion. The company’s trading debut on the New York Stock Exchange is scheduled for February 1.
Despite these upcoming offerings, the valuation overhang remains a persistent challenge. In 2023, IPO observers lamented the valuation haircuts many companies faced due to higher funding rounds in 2021 and 2022, resulting in premiums that the public investing community was reluctant to support. Consequently, many companies opted against going public or found it financially unfeasible.
Private Market Index and the Role of AI
Analysts observe a reset in valuations within the private market, as evidenced by the Forge Global Private Market Index, which tracks the performance of 75 late-stage pre-IPO companies. The index experienced a 20% decline in 2023, indicating a correction in valuations.
Amidst these challenges, there is hope that the index will turn positive, signaling renewed bullishness among private investors and potentially leading to increased IPO activity. Many observers pin their hopes on a wave of AI-themed IPOs to revitalize the market in 2024. Cloud analytics firm Databricks, cloud data management and enterprise platform Rubrik (backed by Microsoft), gaming-focused voice chat service and social network site Discord, and cloud security provider Wiz (valued at $10 billion after a $300 million Series D funding round) are among the frequently mentioned potential IPO candidates.
Challenges Facing AI-Themed IPOs
Despite the excitement surrounding AI-themed IPOs, two significant obstacles exist. Firstly, while numerous small AI startups exist, their growth and profitability are often insufficient for a successful IPO, even in a favorable AI market environment. Secondly, larger AI firms with more substantial revenue and profit potential have the option of shareholder tenders, allowing them to gather interested shareholders and sell their stock to general partners, providing liquidity to employees and reducing pressure to go public.
Continuing Threat of Valuation Haircuts and Trapped Wealth
Despite the potential of AI-themed IPOs, the threat of valuation haircuts remains a concern for many companies. The massive wealth generated in tech startups over the past decade has created a significant need for returns among venture capital firms and their limited partners, making the prospect of a reopened IPO window in 2024 highly appealing. However, the risk of valuation haircuts in the public market continues to pose a challenge for many companies considering an IPO.
Conclusion: Navigating the IPO Landscape in 2024
The 2024 IPO market presents both challenges and opportunities. While the market rally and optimism surrounding AI-themed IPOs offer glimmers of hope, the valuation overhang and the threat of valuation haircuts remain significant hurdles. The performance of modest ETFs and upcoming IPOs will be closely monitored as indicators of the market’s direction. AI-themed IPOs may provide a much-needed boost to the market, but challenges exist in terms of growth and profitability for smaller AI startups and the presence of shareholder tenders as an alternative for larger AI firms. As the year progresses, navigating the IPO landscape will require careful consideration of market dynamics, company valuations, and the potential impact of AI on the overall IPO environment.