Are ASX IPOs in for a struggle in 2022 following the boom?

It could be a tough debut for ASX newcomers this year.

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Key points

  • The market volatility and sharp tech sell-off bode badly for the outlook for ASX IPOs in 2022
  • Experts believe the IPO market will be challenged this year from the market de-rating
  • This sombre outlook comes after the number of ASX IPOs hit a 14-year high last year

The stomach-churning volatility that hit our markets since the start of the year does not bode well for ASX initial public offering (IPO) hopefuls.

This view was echoed by several experts who spoke with The Australian, even though they remain divided on whether this is the time to be picking up bargains after the big sell-off.

The turn in sentiment towards new floats follows a boom in ASX IPOs in 2021. The Australian Financial Review reported 240 listings last year – the highest number in 14 years!

ASX IPOs coming off a high in 2022

Many fund managers seem to believe that the IPO market will be more subdued this year. This includes Tribeca Investment Partners portfolio manager Jun Bei Liu.

"IPO timelines will have to be pushed out," she told The Australian.

"We've seen some very expensive tech stocks debut recently that have performed very poorly and that doesn't bode well for the sector."

Why new floats look vulnerable to sinking

While many ASX IPOs may not be in the tech index, the sharp drop in IT shares around the world is a big turnoff for would-be investors.

This is primarily because of valuations. IPO wannabes want to sell their shares at a good premium, but the derating in the market that is characterised by the tech collapse will make this very difficult.

From this perspective, venture capitalists will be reluctant to float their private companies now, according to Steve Johnson of Forager Funds.

"I think activity in that space will be dramatically curtailed," said Johnson. "The other thing that I think it curtails is their ability to raise and burn a lot of cash."

New ASX IPOs versus established shares

If many market darlings are now trading at more attractive valuations after the pull-back, why would investors want to back an ASX IPO given that the newbie doesn't have the same track record as its listed rivals?

Further, many companies hitting the bourse for the first time are operating at a loss. Investors are less willing to bet on their future growth due to the uncertainty caused by the sputtering COVID-19 recovery and rising interest rates.

Is this time to buy the dip?

Perhaps a more important question for ASX investors now is whether they should be buying the dip. There is much less consensus among the experts on this question.

Liu sees "plenty of bargains" and highlighted Xero Limited (ASX: XRO) shares as an example. Another she finds interesting is the WiseTech Global Ltd (ASX: WTC) share price.

However, Johnson does not agree and warned the Wisetech share price still looks overvalued. He also issued a similar warning about the Megaport Ltd (ASX: MP1) share price.

"Megaport, on 20 times revenue, that's just a very, very, very optimistic valuation," he said.

"We could have a lot of our portfolio invested in this space, but I don't want to do that until I see widespread distress."

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended MEGAPORT FPO, WiseTech Global, and Xero. The Motley Fool Australia owns and has recommended WiseTech Global and Xero. The Motley Fool Australia has recommended MEGAPORT FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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