Sagging stocks compound worries for newly listed tech companies

In the midst of the stock market crisis, some freshly listed tech companies are reverting to private ownership. Most of these businesses currently trade for a significant discount to their listing pricing.

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The years 2020 and 2021 were incredibly active for US IPOs. Tech businesses were in high demand, and many chose SPAC reverse mergers to go public rapidly and take advantage of the market boom.

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Roblox and Affirm postponed their IPO to 2021 after Airbnb and DoorDash saw huge gains on the listing in late 2020. Both increased the valuations and continued to rise on the day of the listing. In a remarkable move in 2020, Unity Software took over decision-making about IPO pricing from investment bankers.

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US IPOs set a record in 2020, and 2021 ended up being even greater. Nevertheless, as the price of tech stocks began to fall in 2022, freshly listed names also saw a sharp decline in value.

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The Renaissance IPO ETF (NYSE: IPO) fell more than 50% last year while the Nasdaq Composite lost a third of its value. Tech businesses make up about half of the ETF holdings.

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In the midst of the slump in stock markets, tech companies go private

Many businesses have either gone private or are suspected to have gone private in the midst of the downturn in newly listed tech equities. The Wall Street Journal said that 10 companies that went public in 2020 and 2021 had committed to sell themselves to private equity firms, using data from Dealogic as support.

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At a valuation that is lower than what they demanded when going public, Sumo Logic, Weber, and Trian Insurance Group are going private.

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Yet, there are certain outliers, such as the case of KnowBe4 Inc., which is going private at a valuation higher than the IPO price.

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There have been suggestions that Lucid Motors' principal shareholder, Saudi Arabia's PIF (public investment fund), is considering going private.

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In a reverse merger with Churchill Capital IV, Lucid Motors went public in 2021. A 50% premium above the SPAC IPO price, the corporation set the PIPE (private investment in public equity) price at $15.

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Significantly, Lucid Motors recovered from trading below $10 on news of the Saudi takeover.

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After the IPO, retail investors typically invest in a company. On how to invest in new businesses, nevertheless, we do have a guide.

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Growth Stocks Just Listed Have Dropped

The majority of recently listed tech stocks have plummeted and are frequently in a fight for survival. Mullen Automotive finally purchased the company's assets after Electric Last Mile filed for bankruptcy.

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Some freshly listed IT firms were charged with fraud, and others, like Nikola and Lordstown, admitted to misconduct. Once Hindenburg Research accused both of these enterprises of scamming investors, their top management left both of these businesses.

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As their stock price trades below $1, many tech stocks, particularly those that went public through SPAC reverse mergers, do not meet the minimal exchange listing standards. Several companies, including Paysafe, have already implemented a reverse stock split to satisfy the requirements for exchange listing.

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SPACs Decrease When Growth Stocks Fall

In the midst of the downturn in tech equities, which were their primary target market, several SPACs disbanded last year.

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Social Capital Hedosophia Holdings IV (NYSE: IPOD) and Social Capital Hedosophia Holdings VI (IPOF), which having raised $460 million and $1.15 million respectively in the IPO, were both dissolved by Chamath Palihapitiya. One of the few SPACs with over $1 billion in IPO proceeds was IPOF.

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One of the causes, according to him, was the target companies' high values. Palihapitiya acknowledged that it can be challenging to locate businesses with a reasonable valuation and margin of safety.

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Also, William Ackman disbanded his first SPAC, which had raised more than $4 billion and was the largest SPAC IPO ever. Ackman acknowledged that there was intense rivalry for high-quality assets because many SPACs were looking for merger opportunities.

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Ackman was looking for established businesses, as opposed to the majority of SPACs, which were looking for rapidly expanding tech companies.

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The Fed's Rate Increases and a Slowing Economy Hurt Tech Stocks

In 2022, rising interest rates from the Fed and a faltering economy hurt tech equities. A lot of free money was created by the Fed's expansive monetary policy and finally found its way into stocks, primarily growth-oriented ones.

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The flow of easy money, which was nothing short of a lifeline for the stocks of loss-making growth businesses, is now being squeezed off as a result of the Fed rising rates to the highest levels in years.

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Also, a lot of young tech companies have struggled with execution and have overstated their strengths. Markets questioned if these newly listed tech companies could actually deliver on the long-term projections that formed the basis of their lofty values as they grappled with their 2022 goals.

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The slowdown in the global economy hasn't helped tech companies either. It would be the proverbial "separating the wheat from the chaff" during the ensuing two years.

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Similar events occurred twenty years ago when a number of computer firms failed and only a select few made it through the dot com bust.