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Why You Can Believe in IPOs Again

After an ice-cold stretch for IPOs in 2022 and 2023, the market is finally starting to heat up, which could bode well for the months ahead.

Sparklers and Champagne Glasses

After a few stagnant years in the IPO market, we’re beginning to see a handful of fresh opportunities arise once again.

Both social media platform Reddit (RDDT) and chipmaker Astera Labs (ALAB) traded considerably higher in their first few sessions after coming public.

That’s not to say that two high-profile offerings signal a red-hot IPO market, or that we should be jumping in with both feet.

But they are definitely a step in the right direction.

Notably, each company represents a step up in deal size for an IPO market that’s been dominated by smaller offerings, and their successful debuts could become something of a confidence booster for other firms.

That translates into more opportunities for investors. Which will be a welcome change after a dismal stretch for the IPO market in 2022 and 2023.

For its part, Reddit raised $748 million in its IPO last week. The company’s initial market cap of $6.4 billion was based on a 34 offer price. The market cap reached as high as $11 billion in the first week of trading but is still hovering near $7 billion even in April’s challenging environment.

Turning to Astera Labs, the company ended up pricing its shares at 36, well above the expected range of 32 – 34. The share price topped 95 in the first full week of trading but has given back some of those gains since.

Like I said, it’s nice to see a little excitement in this market again!

An Ice-Cold 2 Years

Last year (2023) was just awful for IPOs. Only 108 new names came public throughout the entire year, raising just $19.4 billion.

As bad as that was, it was even worse in 2022. Only 71 companies came public and a meager $7.7 billion was raised.

To put things in context, the only other year since 2015 when less than $20 billion was raised was 2016 ($18.8 billion raised).

In every other year since, north of $30 billion was raised, with 2020 and 2021 being exceptionally strong ($78 billion and $142 billion raised, respectively).

In other words, 2022 and 2023 were just pitiful when it comes to new issuances.

IPO Shows Signs of Thawing

History shows that IPO markets warm up slowly, not all at once.

Back in November, I wrote to subscribers of Cabot Early Opportunities, saying, “For things to truly begin to thaw out (in the IPO market) we’ll likely need to see interest rates come down and something of a real bull market take shape in the stock market. The latter could be happening now (not a prediction, just an observation) given that the stock market is forward-looking about six months.

So far that bull market has continued to take shape. The S&P 500 officially recouped all its bear market losses on January 19.

In terms of new IPOs this year, in the first quarter we’ve seen a total of 30 IPOs, raising a combined $7.8 billion.

Interestingly, that’s roughly the same number of deals we saw in the first quarter of 2023. But deal size is way higher in Q1 of 2024. Proceeds are up by a factor of three, to $7.8 billion versus just $2.3 billion at this time last year.

The first quarter of 2024 is also better than the entire year in 2023. Progress!


When to Consider IPOs

As a general rule I don’t like to jump into a super fresh IPO. These can be extremely volatile stocks and there’s often a bout of selling after an initial surge.

We typically see that volatility smooth out considerably after lockup expiration passes. After that point, insiders are free to sell. That’s usually 90 to 180 days after the company has come public. And we can often get a better feel for what the real demand for shares is once lockup expiration has passed.

Of course, the buzz from hot new IPOs is exactly what underwriters and company executives want to see when trying to time new offerings. So in that sense, the initial IPO pop and surge is a good thing!

Stepping back, the relative early success of RDDT and ALAB, as well as decent debuts from some other offerings this year, including BBB Foods (TBBB), Amer Sports (AS) and (KSPI), suggests that as we get deeper into the year more (and bigger) names will come to market.

That supply is exactly what we want to supplement the shopping list of opportunities that are already maturing on the public exchanges.

If you’d like to know more about which IPOs you should consider buying, when to buy, and why shares should do well, consider a subscription to Cabot Early Opportunities. I’ve already locked in 10 profitable trades for subscribers this year and am currently eying a high-growth company that just came public in 2023.

Tyler Laundon is chief analyst of the limited-subscription advisory, Cabot Small-Cap Confidential and grand slam advisory Cabot Early Opportunities. He has spent his entire career managing, consulting and analyzing start-up and small-cap companies. His hands-on experience has taught Tyler that the development of a superior business model is the biggest factor in determining a company’s long-term success. Accordingly, his research focuses on assessing the viability of management’s growth strategies, trends in addressable markets and achievement of major developmental milestones.