The path forward for IPOs as Wall Street warms up to fresh listings

Renewed IPO interest was set to be among 2024's top market themes following a 2023 slump. Social media platform Reddit (RDDT) is a recent addition to the Nasdaq via a long-awaited IPO. The Renaissance IPO ETF (IPO) has climbed by over 40% in the last year and over 13% year-to-date this year.

DataTrek Co-Founder Jessica Rabe explains Wall Street's "IPO window" that companies use to plot the timing of a public offering and her own forecasts for increased IPO activity.

"There were as many as almost 500 IPOs during 1999, and there were a little over 300 during the pandemic-driven speculative tech bubble in 2021," Rabe tells Yahoo Finance. "There are only about 30 IPOs last quarter, so at that run rate... there's not enough volume to signal a genuine market bubble like we've seen in the past."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Luke Carberry Mogan.

Video transcript

MADISON MILLS: IPOs are back with both Reddit and Astera Labs seeing double digit gains in their debuts. And then we have the Renaissance IPO ETF now setting up over 40% in the last year. The jumps have left a lot of people wondering about the possibility of a stock market bubble to come. But our next guest saying the signs are not there just yet. Jessica Rabe, Datatrek Co-founder joining us now to discuss. Thank you so much for being here, Jessica.

Jared here just had the Wi-Fi Interactive pulled up and showed me that Reddit is back to its first day price when it comes to the action on Reddit here. So I am curious from your perspective, does that indicate to you that this current IPO landscape is not that different from what we've seen over the past year plus-ish with the Birkenstocks of the world, the other companies that have gone public and then eventually seen a return to their first day trading price?

JESSICA RABE: Yeah, companies and IPOs certainly don't do well during their first year of trading. Professional investors know that. And that's why they need to be convinced we're in a bull market in order to buy them. Wall Street calls this IPO window, which are specific periods of time when companies can and do go public. They can't just go public whenever they want. The IPO window is finally starting to open after a long drought.

That's because, like you said at the top of this segment, it's partly because relatively new public companies that have IPO-ed within the last three years have finally recovered from 2's bear market. The IPO ETF is up 50% over the last year. That's a big move. That's one standard deviation better than average. But equity investors certainly want to see that this sustained momentum to know they can make money from newly minted public companies.

JARED BLIKRE: So is the signal then, given the relative success, at least on a short term basis-- you look at those opening day pops on Reddit and some of the others that we've gotten recently, that's what grabs the headlines. But it also sends a message, I think, to other issuers that maybe the waters are clearing here. Where do you see the market for IPOs? Is it just going to come roaring back? Is it going to be in fits and starts? How do you see the flows?

JESSICA RABE: Yeah, that's a great point. So as you said, two of the most recent notable tech IPOs, Astera Labs and Reddit, their debut performances were certainly reminiscent of frothier times like in the late 1990s or 2021. From their IPO price through their first day of trading, they were up 50% and 70%.

Now, the mean first day equal weighted IPO return back to 1980 is 19%, but it got as high as 70% in 1999 during the dot-com bubble, and it was up 30% to 50% from 2020 to 2022. However, we don't yet have the volume of IPOs to indicate a bubble.

So for example, they were up there were as many as almost 500 IPOs during 1999, and they were a little over 300 during the pandemic-driven speculative tech bubble in 2021. There were only about 30 IPOs last quarter. So at that run rate, there's not enough volume to signal a genuine market bubble like we've seen in the past.

MADISON MILLS: So what will be the catalyst to increase that volume?

JESSICA RABE: Yeah. So I think the more that we see public companies have successful debuts and more importantly, follow on trading activity, the more public companies or the more companies will come public. Over the last few years, startups have received hundreds of billions of dollars in funding from VCs.

So there are certainly many startups that would love to go public, and especially investors that want that want those exits. But it does take time to ready a company for an IPO. So equity markets need to stay strong for quite a while in order to see the activity commonly associated with bubbles.

JARED BLIKRE: You mentioned a market statistic early on today. And I just want to match it with another one, which is that in the average returns for a first year IPO, that IPO, that ticker will tend to undercut its first day of trading 95% of the time. And so it just tells me that there's no rush for investors who might see one of these flashy IPOs to jump in right away. Just wondering what the criteria might be for investors who are looking to dabble in the market, what might they see in an IPO that finally gives them the green light to trade it?

JESSICA RABE: Yeah. That's a very important point. I think it's super important for your viewers to do a lot of homework. Companies that go public, they're new to markets. They're starting to understand how to communicate with investors. They are a lot more volatile than your average traditional stock. This is not like trading Nvidia or Apple. There are a lot more volatile, and they're a lot more difficult to trade. So we would definitely advise a lot of caution with any IPO.

JARED BLIKRE: All right. We're going to have to leave it there. Really appreciate you stopping by, Jessica Rabe, Datatrek Co-founder.