r/investing
Confusion regarding IPOs, Stock market and valuations.
Massive upcoming AI IPOs will either drain liquidity from existing stocks or fail due to lack of demand, both risking market downturns.
- New capital is unlikely to enter the market due to persistent inflation, high interest rates, and geopolitical risks.
- Capital rotation into massive AI IPOs will force the selling of existing tech winners and index holdings, dragging the broader market down.
- If IPOs fail to attract sufficient capital, AI valuations will shatter, destroying market confidence and causing a broader selloff.
A lot of the AI companies and SpaceX are coming into the market with insane valuations and IPOs. Space X is being valued i read at 1.75 T. Alphabet(google) is raising capital and we have Anthropic and OpenAI which would be hundreds of billions of dollars as well.
IMO, that capital can only really come from two places:
- New capital entering the market
- Capital rotating out of existing stocks
First one is tough. Inflation is still a major issue in a lot of countries, unemployment seems to be rising, interest rates may stay higher or even move higher, and with wars/geopolitical issues and oil prices still unstable, I don’t see central banks going back to easy money or quantitative easing anytime soon.
So that leaves capital rotation.
But if investors rotate capital into these huge AI IPOs, then money has to come out of somewhere else. That could mean selling existing tech winners, index holdings, or other parts of the market. In that scenario, the broader market could take a sizable hit, and retail investors would probably feel the worst of it.
On the other hand, if there isn’t enough capital rotation and these IPOs don’t get the demand they need, then the valuations of these AI companies could get shattered. That could damage confidence in the whole AI trade and still lead the market lower.
So I’m confused. From where im looking its a pitfall either side we fall to.
Either:
- capital rotates into the new AI names and the rest of the market sells off, or
- capital doesn’t show up in enough size, the IPOs disappoint, valuations get questioned, and confidence breaks.
Am I missing something here?
Remember only a portion of company goes public. So it’s not 1.75Tr of capital needed it’s $75bn.
Not saying you don’t have a point, you do, people have been talking about it all year but the market cap figures make it look a bit scarier than it is.
also googles money is coming from e.g. japanese bonds. so its money in Japan being given to them.
also look at the likes of berkshire who have 530 billion in cash and cash equivalents.
depending how much of that is actually in cash they might be happy to issue bonds to google for guaranteed 7% returns or whatever rate theyre getting.
Yeah I head they Berkshire had already reserved either $10bn or 10% of the bonds can’t remember which it was.
Don't forget about margin (money borrowed against current equity holdings, for anyone new to the term), a sort of third entry for your list.
A retired financial analyst I'm following elsewhere online suggested that many retail traders will be buying those big three IPO's using margin. The result is that fresh capital flows into these companies, but it's likely backed by retail debt.
"Retail investors will feel the worst of it" - Retail investors usually suffer more but that's generally due to less investeing expertise in general, not that they specifically will be holding the bag in this case. The whole market is going to correct at some point, Its been due for a while - the valuations of companies are insane and we are now pricing in prospective future revenues almost years down the line. Broadcome lost 20-30% because it was "on target" to meet its baseline goal for the next 2.5 years, and this is happening all over tech. Arguably the "datacenter" and AI frenzy is already overly priced in. the line which means we have either a massive correction coming or a long term stagnant market ahead for the front runners to eventually catch up their revenues to the premium prices we are paying / holding at now.
The total size of these IPO's is peanuts in the market, the bigger news is that bond rates are going so high, they will soon be pricing out regular investments and a portion of the equities market will move to bonds. - this shift alone would be considerably more than the limited billions of these IPOs (They aren't going 100% valuation at the start, there is a market float and then they trickle in).
If the market stagnation happens instead of the correction, this could lead to an international cycle where investments go abroad because there just isn't much growth in the U.S. as it's already priced in.
IPO season this year could be the catalyst for the correction that has been coming or it could just be the wake up call to an era of stagnation. It could also fuel another market euphoria - only time will tell.
Yeah retail always eats it harder because they panic sell at the bottom and FOMO in at the top.
Things are worth what people will pay.
Do I think some baseball or other cards should be worth millions of dollars? No, I don’t. I think it’s insane, much worse of an idea than these AI companies. But quite evidently to a lot of people they are.
No law says you have to buy stocks you dislike or distrust. So buy real estate of CDs or something.