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Unicorns, the nickname for multi-billion dollar startups looking to go public, are starting to become an endangered species on Wall Street. (Of course, unicorns are also fictitious beasts. But you catch our drift.)
The market for initial public offerings, as well as for SPACs – companies debuting through mergers with blank-check special purpose acquisition companies – often dries up in the summer. But there has been an even more pronounced dearth of IPOs this year due to the volatility in the broader market.
According to data from Renaissance Capital, a firm that researches and invests in IPOs, there have been only 53 IPOs so far this year, down more than 80% from the same period in 2021. What’s more, only 94 companies have filed for IPOs in 2022, a decrease of 70% from a year ago.
This means that there may not be a meaningful pickup in new stocks making their Wall Street debuts anytime soon. Still, experts are hoping that some unicorns could hit the market later in 2022.
Grocery delivery leader Instacart filed confidentially for an IPO earlier this year, meaning that it doesn’t have to give many financial details just yet. Instacart valued itself at $24 billion shortly before its IPO filing, but that’s down sharply from the peak valuation of $39 billion in 2021.
There are also reports that private investors in Instacart have cut their valuations even further. It’s not yet clear when exactly Instacart will go public.
“Valuations have largely been correcting themselves from the highs of 2021,” said Rachel Gerring, IPO leader with EY Americas. Gerring said that the stock price drops for companies that went public last year isn’t helping. (Robinhood, Bumble and Oatly are all 2021 IPO “graduates” that have tumbled this year, for example.)
“The underperformance of companies that went public in 2021 doesn’t bode well for companies looking to go public now. Companies are waiting to see how things level out,” Gerring said.
Investors are keeping an eye out for other unicorn IPOs as well, though. Epic Games, the developer behind Fortnite, is an oft-mentioned IPO candidate. And, according to research firm CB Insights, which has a so-called unicorn list tracking the valuations of startups, Epic is worth $31.5 billion.
Crypto investment firm FTX and sports merchandise company Fanatics are also frequently mentioned in IPO rumors. FTX has a valuation of $32 billion, according to CB Insights, while Fanatics is valued at $27 billion.
And then there are the two mega unicorns. ByteDance, the Chinese owner of social media app TikTok, and Elon Musk’s SpaceX. They are both valued well north of $100 billion. Neither company has given any indication just yet that they are looking to go public in the immediate future.
Still, the IPO market should open up a bit later this year. Even if the biggest unicorns stay on the sidelines, other private companies may take advantage of the fact that the broader market has rebounded as inflation fears have started to ebb.
Will Braeutigam, capital market transactions leader with Deloitte, said the IPO window could open up in the fourth quarter of this year or early 2023 for more companies to price offerings.
“The market knows more today about inflation and how the Fed is taming it,” said Braeutigam. “The sun is rising. Things are getting better.”
What’s next from the Fed?
The Federal Reserve’s next meeting on interest rates isn’t until September 21, which seems like eons away in this fast-paced/short-term obsessed world.
But traders may get more clues about how the Fed views the outlook for inflation and the job market at next week’s Jackson Hole event.
The annual symposium, held in the Wyoming resort town in late August, is typically newsworthy. A-listers from the investing world and central bankers typically gather to discuss what’s next for the economy. This year should be no exception. Fed chair Jerome Powell is scheduled to give a speech on Friday morning.
How aggressive will the Fed be with future rate hikes? Investors will be scrutinizing every word from Powell for hints. Currently, fed funds futures trading on the Chicago Mercantile Exchange are pricing in that it’s a toss-up as to whether the Fed will raise rates by another three-quarters of a point in September or just a half-point instead.
Powell isn’t likely to discuss specifics about future rate hikes. He’s more prone to repeat the mantra about how the Fed is “data dependent” and is now going to take things “meeting by meeting” with regards to guidance.
But in light of recent economic data that shows the job market is still strong and that the rate of inflation is starting to cool, some experts wonder if the Fed will be able to slow down the pace of its rate hikes even further. There are worries that if the Fed is too aggressive, that could lead to a recession.
“Powell and other Fed members may be considering if they should stay on their current path,” said Don Calcagni, chief investment officer with Mercer Advisors. “The risks to the downside for the economy are very real.”
With that in mind, Calcagni said he wouldn’t be surprised if the market soon starts to price in the possibility of just quarter-point hikes at the Fed’s next few meetings.
Monday: Earnings from Zoom (ZM)
Tuesday: US new home sales; Earnings from JD.com (JD), Medtronic (MDT), Macy’s (M), Dick’s Sporting Goods (DKS), Smucker (SJM), Nordstrom (JWN), Toll Brothers (TOL), Advance Auto Parts (AAP), Intuit (INTU) and Urban Outfitters (URBN)
Thursday: The Fed’s Jackson Hole symposium begins; US weekly jobless claims; US GDP second quarter revision; Earnings from Dollar General (DG), Dollar Tree (DLTR), Abercrombie & Fitch (ANF), Peloton (PTON), Dell (DELL), Gap (GPS), Ulta Beauty (ULTA), Workday (WDAY) and Affirm
Friday: Fed chair Powell speaks at Jackson Hole; US personal income and spending; University of Michigan consumer sentiment