After a record-breaking 2021, the global IPO market has suffered a drought - hard hit by a triumvirate of war, inflation and interest rate rises.
What this means in real terms was, according to EY, a drop of 45% in global IPO volumes and a 61% reduction in proceeds raised. The largest IPO market – the USA – was even harder hit, seeing declines to levels not seen since the 2008 financial crisis.
Winds of change
Despite this deep freeze, we may soon see a thaw – US inflation has declined from its mid-year peak, an easing that is now fuelling hopes for a curb in the pace of global interest rate rises and, perhaps even for rate cuts.
The impact of this would be simple – to reduce market volatility, a key impediment to the renewal of listing activity.
‘Tremendous’ pipeline
Some market participants are decidedly bullish with Lynn Martin, President of the Intercontinental Exchange, referring to a ‘tremendous’ potential pipeline during a December 2022 interview.
Opportunities
If the IPO market returns, management teams may look to raise additional capital at lower valuations than prevailed one year ago.
Valuations
But how exactly are these offerings priced? Typically, this is done by taking a combination of recent trends in earnings and revenue, current and historic earnings and revenue and forward-looking expectations for growth.
The extent to which each of these factors is emphasized varies by sector and company type. At one end of the scale, a utility is likely to be valued solely based on its current and historic earnings, while at the other, a tech company with a large total addressable market may even be allowed scope for significant negative cash flow while achieving a much higher valuation.
The above being said, given the less certain environment, investors should be wary of the buying into companies that burn large amounts of cash and are therefore heavily reliant on constant infusions of new money.
Here are some of our top potential picks for 2023 – companies with strong revenue numbers and high potential for growth:
Stripe
Expected IPO: 2023
Valuation: €74bn
Revenues (2021): €12bn
While the world of payment processing is not glamorous, Stripe has proven to be a key beneficiary as more business moves online. Investors looking to participate in this revenue generative and profitable business can do so at a near 28% discount to its 2021 valuation
ARM
Expected IPO: March 2023
Valuation: $60bn
Revenues (2021): €2.7bn
Founded 30 years ago, ARM is one of the largest plays in the key semiconductor market. It has shipped more than 230 billion chips and its technologies impact 70% of the global population
ARM’s owner, the cash strapped SoftBank, had been looking to sell the revenue and earnings positive group to rival chipmaker, nVidia, before anti-trust concerns caused the deal to stall and eventually fall apart.
Flexport
Expected IPO: 2023
Valuation: N/A
Revenues (2021): $3.3bn
Unlike many tech companies that have been laying off workers to conserve cash, Flexport has been continuing to grow apace. The company, which provides logistical and supply chain services – an in-demand offering following the exposure of global supply chain vulnerabilities – plans to hire 400 people next year.
This growth is underpinned by consistent revenue growth, with top line earnings forecast to hit $5bn in 2022.
