The trillion IPOs that are on the way are putting the history of Wall Street to the test

Public sentiment and the amount of capital involved in the company can produce initial overpricing, and history shows that often, more comfortable and settled entry points appear several months (or quarters) after the dust of the first days of trading settles.

A study conducted by Yves Bobuch, Kathy Donnelly, Eric Carroll and Kurt Dale, and published in the book “The Lifecycle Trade”, found that more than 90% of IPOs trade at some point below the low recorded on their first trading day. Even when the stock recovers later, the process may take a long time.

For example, after Facebook’s IPO on May 18, 2012, the stock fell 54% from its peak to its lowest, ending the first trading year down 32%. During that period, the S&P 500 increased by about 10%. Spotify, which was issued on April 3, 2018, has struggled to gain momentum. By December of that year the stock had fallen by almost 50% from its peak of $198.99.

Truist Financial’s chief investment officer, Keith Lerner, looked at 30 of the most recent major IPOs and found that returns tend to be negative over both six-month and 12-month periods. In most cases, sharp declines are also recorded during the first year of trading.

Two key points from Lerner’s analysis: the average return for 6 months and 12 months out of those 30 issues is down about 9%. Even in a 3-year period, the data shows that buying shares on the first trading day and holding them for 3 years often yields a significantly lower return than the market return in the corresponding period.

Rare properties with a unique status

Some say that this time, it is about something completely different.

The three companies on the way to Wall Street are no longer large technology issues, but companies of almost systemic importance to the capital market. SpaceX, which seeks to raise $75 billion at a valuation of approximately $1.8 trillion, may become the largest IPO in history. At the same time, in early June, Anthropic submitted a confidential request for an IPO based on a private valuation of approximately $965 billion, while OpenAI submitted a similar request after its latest fundraising rounds were valued at approximately $852 billion. In total, this is a pipeline of issuances with an aggregate value of approximately 3.6 trillion dollars.

Such volumes explain why many on Wall Street believe that the comparison with previous IPOs can be misleading. “These IPO giants will quickly capture both a significant share of the stock indices and the attention of private investors,” said Max Guckman, senior vice president at Franklin Templeton Investment Solutions.

However, it is important to be precise: these companies will not automatically enter the S&P 500 index on the day of the issue. Entry into the Index requires compliance with a series of criteria and approval by the Index Committee. Even SpaceX, if it is indeed issued at a value of 1.8 trillion dollars, will not overnight become part of the leading index in the US (S&P 500). On the other hand, it is expected to be quickly included in various Nasdaq indices and attract demand from basket funds, technology funds and institutional investors who will want exposure to the company from day one.

Beyond size, the three companies enjoy a unique status because they are located in the heart of the hottest trends in the market. SpaceX is associated with the developing space economy, while OpenAI and Anthropic are seen as leading the artificial intelligence revolution. For many investors, these are companies that shape entire industries and not just participate in them.

The enthusiasm is already evident on the ground. “I’ve never been asked as much about an IPO as I am about SpaceX by our private clients and advisors,” Matt Stuckey, chief equity investment officer at Northwestern Mutual Wealth Management, told Bloomberg. However, he admitted that this level of interest is also “a little worrying” from a risk management perspective.

And this is perhaps the main point.

On the one hand, there is history, which shows that even excellent companies can disappoint investors after an IPO, especially when expectations are too high. On the other hand, there is a new narrative, according to which the newly issued are no longer large technology companies, but rare assets with an almost unique status in the capital market.

Therefore, the question is not only when to buy these shares, but whether this is another wave of enthusiasm around technology issuances, or the beginning of a new category of public companies, one that may change the face of the market for many years to come.