The number of initial public offerings is down this year vs. the same time a year ago, but the June 16 debut of fast-casual Mediterranean restaurant chain Cava Group Inc. (NYSE: CAVA) exceeded expectations.
Is that a sign that the chill in the IPO market is thawing?
The company raised about $318 million through the sale of 14.4 million shares. As of June 20, its market capitalization was $4.36 billion.
Cava shares opened at $42, up 91% from their IPO price of $22. That was already higher than an expected price of $19 or $20.
Shares closed June 16 at $43.78, making Cava among the best-performing IPOs this year, especially among companies with a deal size over $100 million.
Some analysts believe its successful debut may encourage other restaurant chains to consider IPOs, which could help revitalize the sluggish market for new issues.
What Will Boost The IPO Market?
However, a March Ernst & Young report, “What Will It Take For The IPO Market To Return?,” found that to spark a new wave of IPOs, several companies must come to market at reasonable valuations relative to factors such as cash flows, profitability, and liquidity.
In addition, to prove to other companies that the market for IPOs has improved, new issues must trade well in the aftermarket.
Ernst & Young identified several factors that could give the IPO market a boost, including inflation moderating; interest rate hikes slowing, stopping, or reversing; market volatility training subdued; commodity prices stabilizing; growth stocks performing well; and earnings estimates remaining stable or improving.
Kenvue, NexTracker Prominent 2023 IPOs
The IPO market hasn’t been entirely moribund. Johnson & Johnson (NYSE: JNJ) spun off Kenvue Inc. (NYSE: KVUE) into a standalone company that markets consumer products, including Band-Aids, Tylenol, and Neutrogena, among many other brands.
Kenvue is currently forming a post-IPO base, which is very typical after a highly-anticipated offering gets an initial pop, then consolidates as early investors grab quick profits.
NexTracker Inc. (NASDAQ: NXT), which went public in February, could already be categorized as a successful IPO. The maker of solar trackers and software for the solar industry is up 66% since its IPO pricing of $24. The offering was upsized due to demand.
In 2023, there have been 72 IPOs on the US stock market, a decrease of 40.98% compared to the same period in 2022, when there were 122 IPOs by June 20.
There are certainly venture-backed companies that the market expects to go public, but so far, they’ve been holding back due to either factors cited by Ernst & Young or possibly to company-specific challenges.
Eagerly Anticipated IPOs
Among the eagerly anticipated potential IPOs are Instacart, Reddit, Stripe, and Databricks. Instacart’s growth has reportedly stalled as grocers are handling more of their own delivery fulfillment, and comparisons over pandemic-era shopping habits become more difficult.
Reddit’s moderators are currently rebelling due to the company’s move to charge third-party developers to access the site’s data. Not exactly the best time to announce plans for an IPO.
Data analytics specialist Databricks, whose revenue reportedly topped $1 billion last year, plans to remain privately held for the moment as it continues investing in AI technologies.
Meanwhile, digital payment system Stripe raised another $7 billion in the private markets to help resolve an issue surrounding employee-restricted stock units, which are due to begin vesting next year, as well as other matters surrounding employee compensation.
Will these companies go public at some point? The answer is almost certainly yes, as venture capitalists want an exit strategy for their initial investments. Acquisitions are another way of exiting, but company founders generally want to maintain their distinct brand recognition, which is harder to ensure in an acquisition.
Bellwether For More IPOs?
Will Cava be the bellwether for a new round of IPOs? As of June 20, no other deals, either large or small, had been priced, although GEN Restaurant Group, which specializes in Korean barbecue, has filed the IPO paperwork with the Securities & Exchange Commission.
In addition, the JAB Holding Group, which owns Panera Bread, Einstein Bros. Coffee and Caribou Coffee, is also eyeing an IPO after failing to launch last year.
Analysts say the timing is better for restaurant operators, as the market has improved dramatically post-Covid.
Risks And Rewards Of IPO Investing
Investing in IPOs, as with any investment, brings risks and rewards. Many IPOs are among the market’s big leaders within their first few years of going public. That’s because new companies have products or services in high demand, they are typically very focused on fast growth, and the management team can still be nimble enough to explore new projects.
However, that doesn’t mean that piling into every new IPO is a good idea. According to a report from U.S. Bank, “Is investing in an initial public offering a good idea?,” there are plenty of pitfalls to avoid.
“Not all IPOs are proven to be long-term winners,” said Terry Sandven, chief equity strategist for U.S. Bank, in the report. “In fact, while many IPOs have flourished, the company path toward financial greatness is littered with failed IPOs.”
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
