- Concerns have risen about the impact of colossal tech IPOs on market structure and liquidity.
- Citi analysts say, however, that the coming mega-IPOs will be readily absorbed by the market.
- Citi also pushed back against concerned about index inclusion, noting that weightings will be relatively small.
Wall Street is bracing for a wave of mega-IPOs, and concerns have risen about what the deluge could mean for market structure and liquidity.
However, Citi think the market can handle it just fine.
The hype is rising ahead of SpaceX's offering next week, and Anthropic and OpenAI will duke it out for the next private tech giant to go public. With trillions of dollars in market cap being added to public markets, commentators say there is a risk of volatility as money drained out of some sectors to free up cash for the mega-deals. Citi, though, isn't so worried.
"The coming wave of mega-Initial Public Offerings (IPOs) looks large by historical standards, yet we believe the market can absorb it. Initial index weights are likely to be modest and then scale up only gradually," wrote JP Coviello in a note to investors on Tuesday.
Anthropic's valuation surged to $965 billion last week, surpassing that of OpenAI, recently valued at $852. SpaceX, meanwhile, is targeting a $1.75 trillion for its IPO.
Part of the controversy around these mega-IPOs stems from a listing rule change implemented to expedite SpaceX's inclusion in the Nasdaq 100. The move drew criticism from commentators and investors, including hedge fund founder George Noble, who argued that it was bad for markets and investors.
But according to Citi, the inclusion process for major stock indexes will likely be a twofold process. Coviello noted that while the Nasdaq has implemented the rule change t o allowing companies to list 15 days after the IPO, the S&P 500 still requires the standard full year before a company can be added.
"Despite their enormous valuations, we expect initial index weightings to be small," the analyst stated. "Index providers weight inclusion on free floats (publicly tradable shares), rather than total market cap, and we expect these listings to debut with very low initial free floats, likely under 10%."
Another concern has been that index funds could be forced to sell off a lot of other holdings to make room for the mega-IPOs that are coming. But Coviello said that Citi doesn't believe this will have a meaningful impact, even as investors rush to pile into the newly minted stocks.
"Because initial free float is low, the passive buying that inclusion requires should be manageable, and our analysis suggests the resulting selling pressure on existing constituents would represent a small fraction of their total market capitalization," he added.
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