AI excitement seen jumpstarting sleepy IPO market — Just not yet

Artificial intelligence is fast becoming the buzzword among investment bankers and private equity firms seeking deals, but any wave of standalone AI IPOs may have to wait until next year.

The AI frenzy is in full swing, making Nvidia Corp. the world’s first chipmaker and just the sixth US company with a $1 trillion market capitalization after its ambitious earnings forecast based on soaring demand for chips to power artificial intelligence applications. 

However, Nvidia’s success stands in contrast to many of the development-stage AI businesses, whose financial models aren’t robust enough for an initial public offering, according to Ted Smith, co-founder and president of the technology-focused investment bank Union Square Advisors.

“The companies in this space are doing really cool, interesting and valuable things, but they still have single digits or low double digits of revenue,” Smith said. He sees AI IPOs as “a 2024 event.”

In the meantime, investment bankers see a lot of activity happening in the AI space. The thinking behind current deals is “which of my portfolio companies can I use to acquire AI assets in order to turbocharge those portfolio companies, rather than what are the interesting early- to mid-stage AI companies out there that I can acquire independent of my portfolio today,” Smith said.

Needed Boost

So far this year, US-listed firms have raised $10 billion through IPOs, down 94% from the same span in 2021 and nearly half of this point last year, according to data compiled by Bloomberg. The market for new IPOs has been moribund since late 2021 with company carveouts and penny stocks accounting for the bulk of this year’s new market entrants.

The view of the AI market and how companies can benefit from the technology has evolved rapidly over the past six months. Software companies, for example, are increasingly integrating AI into their products and services. Salesforce Inc. and Microsoft Corp. are working to integrate generative AI. Meanwhile, Amazon.com Inc. is talking about applying AI to its advertising, and Alphabet Inc. is considering how it can be used in search and productivity tools.

For now, big tech is the most aggressive group in getting its arm around AI. But analysts say the technology has potential uses in many other industries. 

“We’re in a phase of extreme innovation where almost every company is trying to understand how generative AI might be helpful and additive to their business models,” said Fred Havemeyer, Macquarie senior enterprise software analyst.

The landscape will get vastly different in the next six months, Havemeyer said, as companies move quickly to “productize” this technology and generative AI experiments turn into products that are available to users.

Of course, for investors this is all theory. It will take more than that to get AI companies into the stock market. For that, businesses will require a solid position in artificial intelligence, but they will also need real financials and profitability models, said Ann Berry, founder and managing partner at Threadneedle Ventures. 

“Any company that is planning to go public needs to figure out whether it has an AI angle,” she said. “Otherwise, an AI exposure can displace some of its value proposition.”