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IPO market: There's improved sentiment & 'good indicators' for activity, analyst says

Recovery in the IPO market remains choppy as companies like Arm (ARM) and Instacart (CART) see initial downtrends after entering public trading. However, the question remains whether or not investors still have the appetite for future IPOs despite those headwinds. Renaissance Capital Research Director Nick Einhorn joins Yahoo Finance to discuss the current status of the IPO market and how investors are feeling about current and future IPOs.

Einhorn explains, "I think the fact that [Arm and Instacart] got healthy reception. They priced at the high end of the range for Arm, priced at the range for Instacart and Klaviyo (KVYO), that does show that there is demand for IPOs out there."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

AKIKO FUJITA: Looking, Nick, at the Renaissance IPO, always a good gauge of where sentiment is right now. You said that part of the reason we're starting to see more of this pipeline coming to market is because investors are starting to take more of the risk. I mean, beyond what we saw this week, what's in the pipeline that points to the fact that there's more appetite?

NICK EINHORN: Yeah, for sure. The pipeline is still pretty quiet just because a lot of companies are out there waiting to see, you know, how these deals do, what happens with the Fed and everything. But we know there's names like Toro that have that filed last year, looked to poised to be coming again, you know, at the end of this year. Birkenstock filed a few weeks ago, a big consumer name there.

And yeah, certainly the IPO index does show that valuations in the tech sector, but other sectors as well, have been improving this year. You know, definitely very strong in the first eight months or so of the year. Things came down a little bit since then. But we're definitely seeing, I think, improved sentiment towards recent IPOs. A lower VIX is always good for IPO activity, which we have seen over the last few months. So there's definitely a lot of good indicators for future IPO activity.

JOSH LIPTON: And Nick, just playing off the sentiment issue there you raised, and when you look at the reception, the names have gotten, you know, Arm and Instacart, it's been choppy. I mean, what does that tell you about risk appetite right now, the reception they've gotten as they make their public debuts?

NICK EINHORN: Yeah. Yeah, it's definitely been a little bit of a choppy reception. They've all kind of traded down from their first open. And I think that goes to some of the skittishness in the market generally, obviously, with the Fed meeting this week and the potential government shutdown. But also, I think it just shows that IPO investors are still not totally convinced that the IPO market is back. They're a little jittery. Maybe some of them are taking gains early once these companies priced up.

But on the flip side of that, I think the fact that they got healthy receptions, they priced at the high end of the range for Arm, raised the range for Instacart and Klaviyo. That does show that there is demand for IPOs out there. It's just a question of maybe follow through with the aftermarket trading.

AKIKO FUJITA: Nick, follow on that, where is the appetite right now? Is it about companies that are growing with profitability in mind? Is-- you know, we've heard for a few years now that it's not just about growth at all cause. And if that's the case, I guess the second question for me is, what is in the pipeline? You know, those companies that have massive valuations on the private side of things, do those fundamentals match what investors are looking for in the public markets?

NICK EINHORN: Yeah. And valuation has been what's held back the IPO market to a large extent for the last few years. You know, we've seen a company like Instacart as a good example, coming public at a valuation in the $10 billion range, whereas it was privately valued at around $40 billion a few years ago. I think there's a recognition that those kinds of valuations are off the table for now. They're not coming back anytime soon.

So a lot of companies like Instacart have had to reckon with that, you know, on their own before going public. And then, yeah, the growth has slowed for companies like Instacart, but they've shown a lot of progress on first reaching profitability and then improving a lot the last year. And I think that's a similar game plan that we're going to see from other future tech IPOs. Klaviyo is another name that kind of reached profitability or at least breakeven-ish this year. And that's pretty important that they can demonstrate that they're going to be profitable going forward.

And then Arm, of course, a very well-known name, large company, strong market share, very strong margins. So investors definitely want to see a good story about long-term growth, long-term margins. They're not just looking for kind of any hot thing at the moment.