Tech companies that want to raise capital are waiting on the sidelines as market conditions remain tough.
Thomas Hayes, chairman of Great Hill Capital in New York, told TheStreet that tech stocks took a hit in 2022 as many companies saw their shares drop in value by more than 60%, keeping private companies waiting for the capital markets to reopen. .
As of September 21, there will be 238 days without a technical IPO valued at more than $50 million. This dearth of tech IPOs trumps previous records set in the aftermath of the 2008 financial crisis and the dot-com crash in the early 2000s as companies wait for market conditions to improve so they can fetch a good price when they go public.
The Fed’s tightening policy is the culprit
He said the Fed’s pace of tightening and slowing the economy by raising interest rates has affected credit markets and the initial public offering.
“The IPO and credit markets won’t clear until the Fed shows some signs of the peak of tightening,” Hayes said.
He said the pace of tightening needed to slow down from “emergency measures” to raise interest rates by 75 basis points to “beginning of the end measures” of 50 basis points or less.
“Once markets can absorb the new cost of capital, capital markets will open up again,” Hayes said. “Right now, it has been a higher one-way street in terms of prices. We expect to see some relief soon.”
Steve Sosnick, chief strategist at Interactive Brokers, a brokerage based in Greenwich, Connecticut, told TheStreet that IPOs tend to “boom when there are easy monetary conditions and bull markets and right now we don’t have either.”
He said that the dryness of the initial public offerings could have been caused by the madness of the previous SPAC because a large part of the companies that would normally go through the public offering process were swept away by them. SPAC companies were full of money to spend on deals and also offered a less rigorous path to go public than the traditional IPO process.
Angelo Zino, equity analyst at CFRA, a New York-based investment research firm, told TheStreet that private tech companies like Stripe will hold off on going public until volatility reduces in the broader markets.
“You obviously need interest rates to be stable, and that should help valuations and sentiment across the technology space and environment to drive private companies into a potential initial public offering again,” he said. “It was a bad market because of the violent moves in interest rates to the upside.”
Zino said interest rate increases by the Federal Reserve have significantly impacted technology valuations in public markets.
He said companies like Stripe and Mobily, the self-driving division of San Francisco-based Intel, will be late for an IPO in 2022. Mobileye filed for an IPO in March while Stripe filed in 2021.
Instacart, the San Francisco-based grocery delivery company, is another company waiting for market conditions to improve and filed for an IPO with the US Securities and Exchange Commission in May and initially aimed to go public as early as September.
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High-growth technology companies like Nvidia (NVDA) Shopify (a store) and Snap (Explode, Explode) They lost ratings ranging from 50% to 80% while other well-known companies like Snowflake (snow) doordash (dash) and Airbnb (ABNB) Zinno said valuations and stock prices “have fallen sharply.”
“There is no demand for companies to go public in this market – you don’t have investors at this moment and time,” he said.
Zino said the companies going public are high-growth companies that need to “sacrifice profits for growth”.
He said that the technology market will continue to face challenges for the next two quarters and will not improve until 2023.
“It depends on how the market works, but the third quarter is not favorable for tech companies,” Zino said. “I don’t see things getting interesting until the second quarter of 2023.”
Anthony Chan, former chief economist at JPMorgan Chase, told TheStreet that tech stocks are “a long-term sector because they depend on earnings growth over time.”
“Higher interest rates lower the valuation of these companies as their high long-term profits are discounted significantly,” he said. “High interest rates are never a favorable development for companies that reach a larger share of their profits in later years than other sectors that enjoy a steady stream of profits in the near term.”
Chan said some tech companies will have to be patient and wait for the markets to return to more favorable conditions.
“Many of these companies will have to wait until markets have a greater view of peak returns hurting the valuations of these companies,” he said. “In my opinion, 2023 will be more favorable than 2022 and 2024 will be better than 2023 for an IPO.”
Art Hogan, chief market strategist, B Riley Financial, told TheStreet that tech companies that go public too early face weaker valuations in the long run, which has been noted by fintech industry disruptors and epidemic lovers who have seen a 60% drop to 80%. %.
“This keeps them in trouble,” he said. ‘Companies do not go to market.’
Bringing the public out too early, Hogan said, could lead to the next round of the “bottom round.” “Their valuations will be lower than the last round when the capital was raised.”
He said the delay means some companies will have to rely on burning their existing cash flow or even getting “more expensive money” from private equity or angel investors.
“The problem with waiting is the lack of access to the capital markets,” Hogan said. “The good news is that it allows your business to mature more. In 2020-2021 a lot of IPOs were fast and shaky companies that are likely to go public very soon.”
He said the number of deals could go up in 2023 because there will be a quieter yield curve as the Fed will hit 4%.
“It’s going to be a mix of deals that are finally done and mergers could be more robust than initial public offerings,” Hogan said.