After more than two years of little activity in the market, technology initial public offerings are experiencing a revival, according to Morgan Stanley Investment Banking. Companies harnessing or powering artificial intelligence, including both technology and healthcare companies, are searching for public financing and leading the IPO market out of the doldrums.
Higher interest rates in the past few years have made capital more expensive and eroded tech and healthcare company valuations, putting a damper on IPO activity as many companies opted to delay offerings. But now, the market is on track for 10 to 15 tech IPOs this year, after just a handful in 2022 and 2023, says Colin Stewart, Morgan Stanley’s Global Head of Technology Equity Capital Markets.
Some of the strongest IPOs this year have had an artificial intelligence angle, Stewart says.
“Understanding where a company fits into the evolving landscape of AI—transforming the enterprise or the customer experience—is very important,” he says. “Whether it’s healthcare services, health tech, software, Internet services or semiconductors, the AI data angle matters. That’s where people are looking for growth in these sectors.”
IPOs that Morgan Stanley led in 2024 illustrate how AI is driving demand. For instance, Astera Labs, the AI and cloud infrastructure connectivity solutions provider, has traded well since its IPO to date amid high investor interest in the space. Reddit, for which Morgan Stanley acted as lead left bookrunner, also performed well after its market debut earlier this year, as the Internet company entered into data partnerships with OpenAI and Google. “Reddit was historically viewed as just an advertising play, but it has this new data business line that didn’t previously exist,” Stewart says.
Adjusting to Higher Rates and Lower Growth
Even with AI as a potential tailwind, economic uncertainty may lead to lower tech IPO volumes, and interest rates that remain well above 2021 levels means the cost of capital is still relatively steep, which can affect valuations and growth. However, the market is adjusting to a higher-rate environment, Stewart says. Companies can’t delay offerings indefinitely while they wait for rates to return to pre-pandemic levels—especially since those rates were extremely low by historical standards.
Another reason tech IPOs have cooled in recent years is that large private companies have had ready access to funds without turning to the public markets. At some point, though, private sources of financing won’t be enough, and these companies may need to tap the public markets. “We’re adjusting to a new higher cost of capital and to generally lower growth rates,” Stewart says. “But businesses can still be very successful in this environment, but IPO volumes won’t be as high as they were in the peak years.”
AI in Tech and Healthcare
Still, the allure of AI’s potential across the technology and healthcare sectors could continue driving the IPO market for years to come.
In software, investors are interested in potential offerings from companies that are using AI to serve their customers and boost sales more effectively. “Software companies are leveraging AI to be more efficient than their competitors and deliver new customer value,” says Brittany Skoda, Global Head of Software Investment Banking at Morgan Stanley. “They’re aiming to improve customer education and workflows, and to reduce costs and friction through AI-powered processes.”
In healthcare, companies that can generate data or systems that can train AI models are also in demand and may seek capital from public markets. “Healthcare data remains largely siloed, but more companies are looking to assemble the vast amounts of metadata from hospitals. Those who succeed in building truly proprietary data sets that can power AI could appeal to IPO investors,” says Matt Strom, Head of West Coast Healthcare Banking at Morgan Stanley.
One recent example in healthcare AI is Tempus AI’s offering, which Morgan Stanley led. Two thirds of the company’s business is genomic testing, and the other third is generated from combining genomic data with de-identified multimodal patient data, such as imaging or electronic healthcare records, assembled through proprietary data connections with hospitals. The data is then sold to pharmaceutical companies to enable development of better drugs.
“IPOs that Morgan Stanley has worked on this year show that the market has gotten more comfortable with paying for growth again,” Stewart says. “We’re not back to the levels of 2021, but we are getting a fair price for growth. And at those prices, you’re starting to see companies thinking about IPOs again.”
Summary
After two years in which high interest rates and eroded tech valuations curtailed IPO activity, technology and healthcare companies, especially those leveraging AI, are leading a resurgence. Morgan Stanley anticipates 10 to 15 tech IPOs in 2024, driven by AI's transformative potential. Successful IPOs like Astera Labs, Reddit and Tempus AI highlight AI's role in revitalizing the market.
