After a prolonged period of drought in the tech IPO market on Wall Street, this week marked a significant breakthrough with the market debuts of Reddit and Astera Labs. These two companies, although operating in different sectors of the technology industry, were the first prominent venture-backed tech firms to go public in the U.S. since Instacart and Klaviyo in September. Prior to that, there had been a noticeable dearth of significant deals since late 2021.
The lead left spot on both IPOs was secured by Morgan Stanley, emerging as the major winner among banks in this recent development. Previously, Goldman Sachs had led the way in last year's only two big venture-backed offerings, signifying a considerable dry spell for Morgan Stanley. In the waning months of 2021, Morgan Stanley took the lead on IPOs for HashiCorp and Samsara. According to research by University of Florida finance professor Jay Ritter, there have only been a total of 15 tech IPOs in the past two years, following a robust market in 2021 with 121 tech companies going public – the highest number since the dot-com bubble in 2000.
With the recent activities in the tech IPO market, some experts are foreseeing a positive trend in the coming months. New York Stock Exchange President Lynn Martin expressed optimism, mentioning that numerous companies are gearing up for IPOs in the second quarter. This potential surge in IPO activity would be particularly advantageous for Morgan Stanley, which raked in approximately $37 million in fees as the lead underwriter for the Astera and Reddit IPOs.
While these fees may seem insignificant in comparison to the bank's overall revenue, which amounted to $12.9 billion in the last quarter primarily from wealth management, they serve as a beacon for the investment banking unit. This division witnessed a 46% decline in revenue over a two-year period from the fourth quarter of 2021 to the end of last year. The recent Astera IPO resulted in underwriters collecting $39.2 million in fees, with Morgan Stanley claiming a third of the total amount. The overallotment option further boosted fee revenue by an additional $5.9 million.
Astera Labs specializes in selling data center connectivity chips to cloud and AI infrastructure companies. The company experienced a remarkable 72% surge in its Nasdaq debut and continued its upward trajectory with an additional 13% gain in subsequent days. This success can be attributed to the growing investor interest in AI-related ventures.
On the other hand, Reddit, a 19-year-old social media company, finally went public this week, marking a significant event. Morgan Stanley pocketed $13 million in fees from the deal, with a potential to earn up to $5.6 million from the overallotment option. Reddit's shares witnessed a 48% surge on their first day of trading on the NYSE, only to drop by 8.8% the following day. Lise Buyer, founder of IPO consultancy Class V Group, believes that these successful IPOs could signal a revival in the market, potentially paving the way for more companies to go public in the near future.
For investment banks like Morgan Stanley and Goldman Sachs, an IPO is often just the beginning of a long-term relationship with a company. Follow-on offerings, debt raises, and acquisitions are common avenues for future collaboration, solidifying the role of Wall Street firms in facilitating financial transactions. By introducing directed-share programs (DSPs) in the Reddit and Astera IPOs, Morgan Stanley is not only enhancing customer engagement but also creating opportunities for wealth management and other financial services.
The recent resurgence of tech IPOs on Wall Street has brought renewed hope to investment banks and market participants. The success of Astera Labs and Reddit serves as a harbinger of positive developments in the tech sector, offering a glimpse into the potential growth opportunities that lie ahead. As companies continue to navigate the complexities of the public market, investment banks are poised to play a crucial role in facilitating these transitions and fostering long-term partnerships for mutual success.