IP-Whoa

Going public is in — at least for technology companies. Between the upcoming SpaceX IPO on June 12, Anthropic confidentially filing to go public, and the expectation that OpenAI will make its own filing any day now, IPOs have been all the rage in headlines.

Not only are these three companies front-and-center in the current technology revolution, but they're expected to go public at record-breaking valuations: SpaceX's target valuation is $1.75 trillion, Anthropic's most recent valuation was $965 billion (as of May), and OpenAI's most recent valuation was $852 billion (as of March). If the latter two go public later this year as planned, it's reasonable to expect both to do so at a target valuation over $1 trillion.

Those numbers are bonkers. When we compare SpaceX, Anthropic, and OpenAI to the largest IPOs of the past 15 years, they eclipse anything we've seen before.

The excitement is palpable. One could argue the valuations are reflective of just how different this environment is as we experience one of the biggest technology revolutions in history. Investors are drooling over the opportunities in AI and the space economy, and it's hard to see that drying up anytime soon.

That said, there are some concerns over where the capital to fund these IPOs is going to come from. Will investors need to sell some of their existing AI exposure to buy shares of the newly public companies? To some extent, yes, particularly for investors trying to manage concentration in certain industries and themes.

But is that risk big enough to threaten AI as the return driver of broad indices?

Be Prepared: Pattern Recognition

The IPO landscape has changed in the past 15 years, most notably the size of the companies going public. Gone are the days when most companies go public as small-caps and investors buy on the hopes of them growing into large-caps over time.

But one of the things that hasn't changed is the volatility that newly public companies can (and most often do) experience in the first year of trading.

The volatility is driven mainly by the market going through a period of price discovery as it gets acquainted with the company. Newly public companies see meaningful stock price swings based on a few big factors: Quarterly earnings reports that investors use to recalibrate expectations, the expiration of lockup periods (when insiders are able to start selling shares), and oftentimes, macro economic or broad market forces that affect risk appetite.

To put it simply, investors participating in IPOs should be prepared for a heightened level of volatility in the stock during at least the first 12 months of trading. Here is an illustration of previous IPOs and the range of outcomes in the first year:

As a company becomes more seasoned in the market, volatility should lessen, but it can take time. And returns can vary widely.

Enough Money to Go Around?

Back to the question of where investors will source the funds to buy these upcoming IPOs. It doesn't require a huge leap of logic to assume that at least some of the money will come from investors' existing AI holdings. Of course, we can't predict that exactly, and the source of funds is likely to vary widely between individual and institutional investors. It's also logical to suggest that there's still plenty of capital to go around: Household exposure to equities is at a record high, and broad market indices have seen very strong returns for the past three and a half years. Stocks are up, and liquidity is ample.

These large IPOs are newsworthy and deserve the attention they're getting. It's yet to be seen if they will serve as an indicator of continued insatiable demand for AI and innovative technology investments, or if they'll be met with more tepid enthusiasm. My bet is on the former.

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