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Tech IPOs face ‘turbulent times ahead,’ strategist says

Neil Shah, Edison Group Director of Research, joins Yahoo Finance Live to discuss the outlook for the IPO market.

Video transcript

AKIKO FUJITA: Well, tech IPOs have now fallen to lows we haven't seen since 2009. But there could be some bright spots ahead. Intel self-driving unit Mobileye unveiled on Friday it will be filing for a US listing that would be a notable move in the space. This comes as most companies that came to market since 2020 are trading 84% below their issue price.

For more on that, let's bring in Neil Shah. He's Edison Group director of Research. Neil, we've heard over the last six months or so over and over that a lot of these tech companies don't want to come to market because of these tough comps. Have we seen anything shift fundamentally that would lead us to believe that things or at least the tide could be turning?

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Think it's way too early for that. I still think that there's a couple of at least six months of turbulent times ahead. And I think if you look back at the performance of the 2000, 2001 IPOs, there's nothing there attractive to investors. I mean, most of them are underwater. Some of them substantially underwater. And I think it's going to be a hard ask to get investors to reconsider IPOs for the time being.

AKIKO FUJITA: Given that said, we did talk about Intel's Mobileye coming to market now. I mean, what do you make of the timing of that? And is that a different story from some of these other startups that we've been eyeing that could have potentially come to market but that have delayed their listings now?

NEIL SHAH: So, I mean, you can't get IPOs away. So it's interesting that Porsche did make-- was able to successfully IPO. I think Mobileye is another contender. It's a sizable IPO timing-wise. You know, Intel is about to go through a substantial CapEx exercise. The selling down the stake in Mobileye will help it fund the two new fabs that it's planning to build. And it's [? non-core ?] to what Intel is doing.

So what stands out for Mobileye from the work we've done, it is better than most of the competition. So it has a competitive edge in terms of what it's doing. So there is a chance that this is going to be successful as an IPO. I can see the rationale for Intel wanting to sell down its stake. But the real question is, what kind of valuation are they going to get? And how much interest are they going to get?

AKIKO FUJITA: In so many ways, the expectation game has shifted, especially in tech. When you think about where things were just a few years ago, was about the growth rate of these companies. How rapidly that was happening. Now, it is about profitability. When you think of that being sort of the core case for investors to put their money behind these companies, how many companies you think are out there that are close to listing that really could see a pop or actually see meaningful gains by coming to the public market?

NEIL SHAH: So let me walk you through how investor sentiment is currently working. There's a lot of headwinds for these companies and the coming quarter and probably the coming six months and, you know, whether that's consumer demand or costs, et cetera. So there's a fair degree of earnings uncertainty. And you're seeing the split between investors. Those are focused on the near-term and the impact and downside risk that you got to see on stocks and those that are focused on the medium term.

Now, and the work we did on looking at the 2020 and 2021 IPOs, we also ran this valuation screen and a cash and balance sheet screen. And what it's telling you is that there are some interesting companies that need to be revisited in that group of companies. And if you patient and you've got a long-term view, you might be picking up some great bargains. So I think timing-wise, I think that the window is going to remain difficult for the next six months to get companies away.

Longer term, if you start to see some of these companies that had come to market earlier starting to recover, starting to be recognized for their medium-term potential, I'd take that as a sign that the markets are ready and receptive to some new companies coming. And we had some feedback from a European-based fund manager who looked at 45 IPOs that had come to market over the last couple of years. And he concluded that only five were investment grade. So if you're going to come to market, you've got to have something special for investors take notice.

AKIKO FUJITA: Finally, Neil, we have seen a notable absence of Chinese companies listing in the US so far this year. Now, you've got an agreement between US and Chinese regulators about the accounting rules. There's still a question about whether, in fact, these companies that have already listed will abide by those rules. But to what extent does that clear the air? This cloud that's been hanging over some of these companies, are we likely to see a more robust pipeline of Chinese firms looking to tap into US markets?

NEIL SHAH: I would argue that the appetite is going to-- there's so many great companies that you could pick up at a bargain price, which are domestic US companies that I think that a lot of investor focus is going to go on those companies revisiting things that they know and assessing the fundamentals of those businesses on a long-term basis. And so I'm not envisaging a rapid flow of Chinese IPOs.

Now, if you see companies coming back to market, they've got to have something special in terms of their growth characteristics or their profitability. And there are some. There are some Chinese companies where they've got unique positions in the mineral sector or in a particular area where I think it might be a compelling investment proposition. But I'm not envisaging a raft of new companies coming to market.

AKIKO FUJITA: Hard to believe we're just a few months out from the end of the year. Neil, good to have you on today. Neil Shah, Edison Group, director of research.