One would think that a two-year bull market with high valuations would lead to a wave of initial public offerings. However, that hasn't been the case.
Companies have stayed on the sidelines, waiting for volatility to subside and more stable conditions to emerge. Through the first three quarters of 2024, 946 IPOs raised $76.4 billion, well below the $95.8 billion raised in the same period last year, according to S&P Global Market Intelligence.
The Federal Reserve has begun to lower interest rates, and the market expects rates to keep falling in 2025. Along with an economy on solid footing and some signs of stability, these conditions could unleash a wave of IPO activity next year. Media reports suggest several artificial intelligence companies are already preparing to go public at massive valuations next year. Here's what you should be watching.
An easier environment
In October, Nasdaq (NDAQ -0.89%) CEO Adena Friedman also said she expects the IPO market to pick up steam again. Friedman said many late-stage start-ups are still getting ready to go public, but the private markets have been a good place to be in the interim:
[Late-stage companies] want to have 12 months of really strong performance before they start to think about coming out. The cost of capital environment has made it so that companies, those that are relying on capital to continue to grow their businesses, are definitely trading at a discount.
It shouldn't surprise investors to hear some big AI companies are gearing up for their public debut given how AI stocks have taken on huge valuations in the current market. In late September, Nvidia competitor Cerebras filed its IPO prospectus. Cerebras has built a chip that is the size of a full silicon wafer, which it proclaims to be 20 times faster than chips put out by Nvidia. Cerebras previously said it would target a $1 billion raise at an $8 billion valuation. Reports from October, however, have suggested the company may have to delay its IPO due to a national security review.
Image source: Getty Images.
Data center company Switch is another potential IPO candidate. In September, Reuters reported that Switch was contemplating a deal that would value the company at $40 billion. Switch renewable energy data centers boast clients like Nvidia, Dell, and FedEx. A group of investors took the company private in 2022 for $11 billion. Switch appeals to companies that require massive amounts of energy-intensive data storage.
And just days ago, Reuters reported that another AI company, Coreweave, is also planning to go public next year at a $35 billion valuation. The company recently completed a $650 million secondary share sale, supposedly pushing its valuation to over $23 billion. Coreweave provides cloud-based graphics processing units (GPUs) to AI companies, and Nvidia is an investor in the company.
Will IPO activity materialize?
Many companies have been waiting for interest rates to fall. Given where AI valuations currently are, private companies in the space do have a strong incentive to go public as soon as possible.
However, it's also been a volatile few years, and the U.S. economy hasn't necessarily won its war with inflation yet. Some fear the new presidential administration could adopt inflationary policies, and if the Fed doesn't end up lowering rates as much as anticipated, the IPO market's recovery may stall.
Regardless, going public is a long process, and given the pent-up demand, I expect to see renewed momentum in 2025.
