This is the year of the giga-IPO. SpaceX, Elon Musk’s aerospace and artificial-intelligence company, raised a record $75 billion in capital when it went public earlier this month, instantly becoming one of the 10 most valuable companies in the world. The AI giants Anthropic and OpenAI, meanwhile, both recently filed to go public later this year, ensuring that in a matter of months, we will likely witness the three biggest IPOs in history.
These massive IPOs are outliers in other ways too. The number of businesses going public has been shrinking dramatically, from more than 500 or so a year in the 1990s to about 120 a year over the past decade. Although the number of new businesses in the United States has surged in recent years, the number of public companies is down by almost 40 percent from its 1990s peak.
So why are these buzzy companies in the hottest industry bucking this trend and going public? The answer is simple: because they need to raise staggering amounts of money to cover the enormous cost of competing in the AI race. This marks a fundamental change in the technology business.
[James Surowiecki: SpaceX is basically a huge meme stock]
Many tech giants of recent decades—think Facebook, Uber, and Airbnb—went public less to raise money than to give their early investors and employees a chance to cash out by selling stock. Although software and internet-based companies invested plenty in research and development, their capital expenditures were otherwise low. They built massive, and massively profitable, businesses without much in the way of up-front costs. (Even Amazon’s profits come mostly from its web-services business, not from retail.) At the same time, a boom in venture capital and private-investment funds allowed founders to raise money without subjecting themselves to the regulatory and reporting requirements of public companies.
But developing AI is ludicrously expensive. SpaceX’s AI business, for instance, is burning through $1 billion every month. OpenAI lost a reported $38.5 billion last year, according to financial statements uncovered by blogger Ed Zitron. These companies are consuming capital at a record pace to build out data centers—and, in SpaceX’s case, all of the other stuff that Elon Musk wants to make. Although SpaceX has had no shortage of private investors, the company just got masses of cash by capitalizing on record-high investor demand. And because these companies are not yet profitable and likely won’t be for a while, they are relying on the public’s hunger to get in on the AI boom to raise the tens of billions of dollars they need, and to allow some employees and early investors to cash out.
[Charlie Warzel: The myth of SpaceX]
Since 2003, companies have returned more money to shareholders than they have raised in the stock market. But that trend now appears to be reversing. Pretty much every Big Tech company is investing ungodly sums simply to be relevant in the age of AI. Even profitable companies are pouring much of their revenue back into their business—and they’re now starting to tap the stock market too. Alphabet, Google’s parent company and one of the most profitable companies in the world, recently announced that it would be selling new stock to the public to raise $85 billion, all of it earmarked for AI. In February, the tech giant Oracle said that it would be selling $20 billion in stock. And earlier this month, the Financial Times reported that Meta, too, is contemplating a big stock offering. JPMorgan Chase estimates that companies will sell $1.5 trillion in shares over the next two years.
Historically, this combination of a wave of IPOs and a rise in existing companies issuing more stock has not boded well for stocks in the long term. In many cases, a big surge in stock supply overwhelms demand—and raises questions about whether markets are properly reflecting value or inflating a bubble. As the economist and hedge-fund manager Owen Lamont has written, “When firms are selling, you should generally sell as well.” The volatility of SpaceX stock, which has tumbled for days, erasing nearly all of the gains enjoyed by the average investor, shows just how much uncertainty attends even the most hyped stock offerings in a risky industry.
The SpaceX, Anthropic, and OpenAI IPOs and the stock sales by the Googles and Oracles of the world are happening because companies are trying to raise as much money as possible while the good times last. And that should make us wonder about how much longer they will.
*Illustration sources: Matteo Della Torre / NurPhoto / Getty; Spencer Platt / Getty; Samuel Boivin / NurPhoto / Getty.
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