The slump in the stock market since the start of the year has caused the longest drought in US tech stocks this century, with experts wary of the pace of a revival even after preliminary signs of life in other sectors.
Wednesday will mark 238 days without a tech IPO worth more than $50 million, surpassing the previous records set in the wake of the 2008 financial crisis and the early 2000s dotcom crash, 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 fight to bring down inflation through aggressive interest rate increases. Higher rates hit share values by reducing the value of future earnings, and have triggered fears that the economy will be pushed into recession.
High-growth technology stocks dominated last year’s record-breaking IPO market and made some of the biggest gains during the stock market boom, but they have also been disproportionately affected by this year’s selloff.
The tech-dominated Nasdaq Composite has fallen nearly 28 percent so far this year, compared with a fall of just over 19 percent in the S&P 500, while the Renaissance IPO index, which tracks U.S. companies listed in the past two years, is down 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 need to see some stabilization in the outlook and investors going back to buying existing public securities before they are willing to go further out on the risk curve and buy technical IPOs.”
Life insurer Corebridge last week completed its first US$1 billion IPO since January, and the cautious early reception highlighted investor wariness even for more established and profitable businesses.
Even after the Corebridge deal, total U.S. IPO volume is down 94 percent year-on-year, with just $7 billion raised so far in 2022 compared with $110 billion in the same period last year, according to Dealogic data.
Corebridge was closely watched as a sign of investor appetite for more deals. But Nicole Brookshire, a partner at law firm Davis Polk who specializes in technology listings, said other factors such as weak earnings reports could have “a bigger impact” on the outlook for new technology issuers.
“Mentoring has deteriorated with certain companies and sectors [and] many companies are feeling the effects of macro headwinds, and that is affecting valuations, she said.
IT groups in the S&P 500 roughly met earnings estimates in the second quarter, according to FactSet, but forecasts for the third quarter have been repeatedly downgraded, with earnings now expected to fall 4 percent year over year.
Many technology groups have responded to the slowdown by putting more emphasis on cutting costs and showing progress toward profitability, but Brookshire said companies would 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 switching 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, SVB’s Walsh added, is the fact that tech companies raised so much private capital before the downturn that “there’s not the same sense of urgency”. He said he expected “a small group” of companies to still try to list this year, but said most had already pushed back plans to 2023.