Through the prior two years or so, very few companies and no notable companies have stepped up to complete an initial public offering (IPO). Instead, companies have remained private while their valuations have broadly declined, partially due to borrowing costs rising significantly through that period.
That sound that you heard yesterday, last heard with any volume in late 2020 and in 2021 when tech firms Snowflake and Doordash went public, was a thawing of the IPO market. Listing on the NASDAQ yesterday were shares of Arm, a computer chip design company, which saw its share price gain close to 25% by the end of trading.
Coming soon to the public markets will be shares of Instacart (grocery delivery business which thrived during covid and is now earning larger revenues in advertising) as well as Klaviyo (a marketing automation company) – both have filed to list shares in the near future.
The success demonstrated by Arm could carry over and provide meaningful support for Instacart and Klaviyo, largely dependent on continuing interest from institutional buyers in new financings. Benefiting from what they believe to be continuing interest, Instacart is considering increasing its initial share price based on the demand expressed in Arm shares.
Investors are again seeking equity ownership in high growing tech companies which is a welcome change from two years back. Where this differs is in the valuations that companies are garnering in their IPOs. Although revenues may have grown through prior years, the multiple that investors are willing to pay for those revenues has largely declined. This is akin to a property purchase which continues to command the same monthly rental income as it did two years ago (increasing with inflation each year, to be fair) but now has a sale price which is meaningfully less than what it was two years back. The income remains the same, the multiple paid for this rental income has declined.
This may be the shot in the arm that the IPO markets and private equity markets require. Instacart’s offering is slated to list next week. It can feel like a long time while waiting, but we are getting closer to a new beginning for these markets.