A trader wearing a mask walks near social signs the day a new IPO starts on the New York Stock Exchange as the city resumes Phase 4 reopening after August 27, 2020 in New the spread of the coronavirus has been restricted in York City. The fourth phase enables outdoor arts and entertainment, fanless sporting events, and media production.
Alexi Rosenfeld | Getty Images
Nobody would have believed it three months ago, but this could turn out to be the biggest year for IPOs since Alibaba went public in 2014.
According to Renaissance Capital, 111 companies have already raised $ 37.8 billion. It raised $ 85 billion in 2014, the year Alibaba went public.
And that without the SPAC market, which is also on fire.
What's behind the enthusiasm?
Element 1 for a hot IPO market: A hot stock market
"First and foremost, the stock market is on fire," said an IPO trader who wanted to remain anonymous. "As long as you have a hot stock market, you will have a hot IPO market."
Element 2: The most recent IPOs showed an outperformance
Second, the recent IPOs have burned it. "Seventy percent of all IPOs trade above their issue price, well above the average of about fifty percent," said Kathleen Smith of Renaissance Capital, who advises investors on IPOs. "IPOs are now attracting momentum players."
The Renaissance Capital IPO ETF (IPO), a basket of around 60 largest IPOs in the last two years, has risen 64% since the start of the year and far outperforms the broader market.
Most importantly, technology companies dominate the outperformers, especially software.
Most recent IPOs (from issue price)
Vroom by 235% Zoom Info by 83% Rocket Companies by 87% Li Auto by 54% Jamf by 47%
Element 3: A strong pipeline
And software is what is to come: a tidal wave of enterprise software companies are trying to go public right after Labor Day to capitalize on the positive convergent trends. Snowflake (cloud data analysis), Unity Software (3-D video games), Bentley Systems (software for construction projects), GoodRx (price platform for prescription drugs), JFrog Holdings (software update platform) and Sumo Logic (data analysis) have S. -1s off and will likely try to go public soon after Labor Day.
Two other companies – Asana (project management) and Palantir – have both announced that they would use a direct listing approach to go public.
They all have that magic ingredient: strong sales growth.
Sales (YOY growth)
Snowflake: plus 173% Unity Software plus 42% Sumo Logic plus 50% JFrog plus 65% GoodRx plus 55%
Source: Renaissance Capital
It's still growth over profitability
What about profitability? Of those, three (Snowflake, Unity Software, Sumo Logic) are losing money while JFrog and GoodRx are profitable, says Smith.
Regardless, growth is important.
"The bottom line is that investors are still tracking growth," Smith told me. "The risk is that everything they say on the roadshow will be done better and a path to profitability will be shown."
Why is software so dominant? The work-from-home phenomenon is forcing companies to modernize their technical infrastructure. As such, everyone from retailers to banks to law firms and medical offices will need to upgrade.
"This virus accelerated the change from ten years to six months." Pat Healy, who advises companies going public with the Issuer Network. "These are tools that people can work with remotely and the demand for these tools is increasing."
A magic mushroom IPO?
Finally, amid a sea of tech offerings, there's a strange man: Compass Pathways (CMPS), a UK-based company that wants to commercialize a psilocybin-based therapy for depression.
Psilocybin? As with psychedelic mushrooms? Yes that's it.
I think Timothy Leary was right.
"This gives new meaning to a market high," joked one trader.
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