Decline in tech IPOs: Therefore, the mood on the IPO market is likely to remain subdued in 2023

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• Strong IPO year 2021
• Turnaround in interest rates, inflation and the Ukraine war weigh on sentiment
• Discipline required of IPO candidates

2021 peak year for IPOs

While there was still great uncertainty on the market in the first Corona year of 2020, tech companies in particular subsequently benefited from the measures taken to contain the virus. Startups in particular took advantage of this friendly environment and ventured onto the trading floor. The IPOs of heavyweights such as the crypto platform Coinbase, the trading app Robinhood and the Tesla competitor Rivian attracted a lot of attention. The IPO of the electric car manufacturer even blossomed into the largest IPO of 2021 with proceeds of 11.9 billion US dollars.

flop year 2022

In 2022, however, the picture was completely different. Not only did high inflation rates cause restraint among tech companies, but the war in Ukraine also unsettled companies and investors alike. With the beginning of the turnaround in interest rates, the environment for young startups changed abruptly, since the valuations of the not yet profitable newcomers were linked to the previous low interest rate level. The result: numerous stock market candidates who had previously announced IPOs postponed the IPOs or even canceled them entirely. With the VW subsidiary Porsche and the Intel spinoff Mobileye, there were still a few brave ones in the IPO year 2022.

Dismal environment for stock market candidates

Ben Rose, president of analytics firm Battle Road Research, now believes the “source for tech IPOs” has dried up – and isn’t likely to change anytime soon. In a comment for the market portal “MarketWatch”, the expert explained what the IPO lull in the past year was all about and why he is not particularly optimistic for 2023 either.

The 40 rule is long outdated

According to Rose, tech companies have long adhered to the rule of 40, which states that sales and earnings growth must add up to at least 40 percent to guarantee sustainable demand for a company’s valuation. “This formula worked for several years before tech stocks plummeted last year,” he said. While the industry giants grew strongly during the corona pandemic and hired numerous new employees as a result, it has now become clear that the growth was not sustainable. For this reason, corporations such as Google, Amazon, Meta Platforms & Co. recently announced extensive job cuts. “The decision by companies that were already profitable to reduce operating expenses is a sign that the terrain has shifted from growing revenue at all costs to growth with a sustainable level of profitability,” Rose affirmed.

Changed environment

If you look at the technology companies that have been listed on the stock exchanges for some time in 2021, they have already achieved sales growth of often more than 20 percent in the year before their respective IPOs, according to Rose. Those companies that only went public in 2021 and that Rose observed in his own “Battle Road IPO Review” were not only not profitable the year before, but even made significant losses. “Not only were companies unable to turn a profit, virtually all of them posted even larger losses year-over-year, as if the companies were being urged by their shareholders to have one last feast to celebrate revenue growth boost,” explained the analyst. “Many of these companies promised that once they went public they would embark on a steady diet of reduced operating expenses to chart a sensible path to profitability.”

Focus on profitability

If companies aren’t yet profitable, they commit to proving to investors that they have a viable business model, Rose said. “The concern is that a company that loses money today will have to be bailed out tomorrow with future equity offerings or convertible bonds, which in turn will dilute the interests of existing shareholders.” Share buybacks are also a long way off for such companies.

Conversely, profitability is an indication that a company not only has the potential, but also the power to “determine its own destiny”.

Discipline required from stock market candidates

Stock market candidates who want to start trading before the end of this year must therefore have the discipline not only to increase sales, but also to reduce losses. However, Rose believes that few companies with IPO plans have the qualities. “However, the message that growth at any cost is no longer enough is learned the hard way,” said the analyst. This is possibly to be understood as a sign that the time for an IPO has simply not yet come. “A company that is unable to turn a profit today – no matter how promising its growth prospects are – may not be ready for the stock market turmoil just yet,” Rose continued. “And if an unprofitable company slips through the IPO window, it will likely need to be bailed out by a fresh round of investors, public or private.”

Short list for 2023

Compared to the IPO year 2021, the list of companies that still want to venture onto the trading floor in 2023 is relatively short. In February, IONOS, the hosting subsidiary of 1&1, was listed on the stock exchange in Germany. Other candidates include the chip designer Arm, the Novartis subsidiary Sandoz and the chip manufacturer Ampere. “Until private companies and their financiers realize that the terrain has shifted from growth at all costs to growth coupled with profits — or at least a short-term path to profitability — the well for tech IPOs is likely to remain dry “Rose is sure.

Citi analysts more confident for 2023

However, analysts at the major US bank Citigroup were significantly more optimistic in December. According to finews.ch, Citi strategist Valery Barrier expects the economic environment to improve significantly in 2023, which should also give the market for IPOs a boost. “The investor base for minority private equity placements has become more structured and has better defined processes,” the analyst said. Nevertheless, no sudden change in mood is to be expected. First of all, there will still be some IPO cancellations or postponements before more and more young companies dare to step onto the floor, according to Barrier.

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