Quiver Quantitative - The recent spike in interest rates has negatively impacted the performance of newly public tech companies. Companies like Arm (ARM) witnessed a dip below its IPO price, marking its fifth consecutive decline and erasing nearly a quarter of its value. Meanwhile, Instacart saw its shares fall about 29% from a peak set only two days prior, and although Klaviyo (KVYO) experienced a 3% rise, it remains significantly below its debut level. This trend emerged before the Federal Reserve Chairman Jerome Powell's recent remarks, but was exacerbated following the Fed’s announcement, suggesting a potential rate hike later this year and no forthcoming rate reductions. The S&P 500 fell nearly 1.6% on Thursday, its steepest drop in six months.
The persistence of high interest rates poses challenges for emerging companies, particularly those reliant on cash for expansion, as their valuations often rest on the anticipation of considerable profit growth in the distant future. This challenging environment may lead prospective public companies to reconsider their IPO timelines. Matthew Kennedy from Renaissance Capital highlighted that tech IPOs will now need to exhibit exceptional growth and profitability and might still have to be priced at a discount compared to public counterparts.
The IPOs of Arm, Instacart (CART), and Klaviyo had initially hinted at a rejuvenation of an IPO market that had been largely stagnant for almost two years. Together, they raised a collective $6.5 billion over the past week. Despite their early success, overall IPO funding this year sits at $21.4 billion, nearly matching the total for the same period in the prior year, but a sharp 92% drop from 2021.
The broader market also reflects this downturn. The Nasdaq 100 dropped 3.3% after Powell’s address on Wednesday. Additionally, a Goldman Sachs Group Inc (NYSE:GS). assembly of profitless tech firms plummeted by 7%. Notably, the 10-year Treasury yield surged to nearly 4.5%, its peak since 2007. With the IPO market facing scrutiny in the coming weeks, firms such as German shoemaker Birkenstock and Vietnamese internet platform VNG are set to debut. These new entrants will need to be vigilant about their valuations, a lesson apparent from the recent underperformances.
This article was originally published on Quiver Quantitative