The impending initial public offerings (IPOs) of three major artificial intelligence (AI) powerhouses – SpaceX, Anthropic, and OpenAI – have sparked widespread speculation about their potential impact on stock market liquidity. However, veteran strategist Ed Yardeni, president of Yardeni Research, has publicly dismissed these concerns, arguing that fears of a significant liquidity drain are largely unfounded. In a recent blog post, Yardeni stated that his firm is “not as concerned” as other market analysts who predict that these so-called “AI-3” companies will “suck the oxygen out of the rest of the stock market.”
The upcoming public debuts are significant events in the financial world. SpaceX, the pioneering aerospace manufacturer founded by Elon Musk, is slated to go public on June 12th. Meanwhile, AI research and development firms Anthropic and OpenAI are also reportedly in advanced stages of preparation for their own IPOs, though specific dates have not been finalized. The sheer scale and innovative nature of these companies have led some to believe their capital requirements will divert substantial funds away from other publicly traded assets, potentially depressing broader market valuations.
Yardeni’s counterargument is rooted in historical IPO data and the projected scale of these offerings relative to the overall market capitalization of major stock indices. He points out that the capital sought by the AI-3 is a relatively small fraction of the existing market value, and crucially, that these companies are expected to offer a limited supply of shares to the public.
Historical Precedent and Market Scale
Historically, large IPOs have sometimes led to temporary shifts in market liquidity, but Yardeni’s analysis suggests this scenario will be different. He cites the recent performance of the equity issuance market, noting that over the past 12 months, ending in April, the market has financed $232 billion in new equity. In 2021 alone, a record-breaking year for IPOs, more than $450 billion was raised through equity offerings.
"In any event, the AI-3 should have no trouble raising $200 billion in the IPO market, which has financed $232 billion in new equity issuance over the past 12 months through April," Yardeni wrote. He further contextualizes this by comparing it to the sheer size of major market indices. The Wilshire 5000 Total Market Index, a broad measure of U.S. publicly traded equities, currently stands at approximately $75.6 trillion, while the S&P 500, which tracks the 500 largest U.S. companies, is valued at around $60 trillion.
The projected capital raise of $200 billion by the AI-3, even if it reaches the higher end of estimates, represents a modest percentage of these colossal market figures. This suggests that the broader market has ample capacity to absorb such an issuance without experiencing a severe liquidity crunch.
The Impact of Free Float
A key element of Yardeni’s argument hinges on the concept of "free float" – the number of shares that are actually available for public trading. He emphasizes that even if the AI-3 companies raise significant sums, the portion of their equity being offered to the public will be limited, thereby mitigating their impact on overall market liquidity.
"The market capitalization of the Wilshire 5000 is $75.6 trillion. It is close to $60 trillion for the S&P 500. Will these measures increase by $4 trillion to $5 trillion when the AI-3 go public? Not based on free float, i.e., the shares that are available for the public to trade (excluding closely held shares, insider holdings, and government stakes)," Yardeni explained.
He provided specific examples, noting that SpaceX is expected to float only about 4.3% of its shares to the public. While precise figures for Anthropic and OpenAI are not yet public, Yardeni anticipates that they too will offer "relatively puny free float." This limited supply of publicly tradable shares means that while the companies will raise substantial capital, their direct impact on the trading volume and liquidity of the broader market will be contained. Institutional investors and retail traders will have access to a restricted portion of these highly sought-after stocks, preventing a widespread sell-off of other assets to acquire them.
The Companies Behind the IPOs
The companies preparing for these landmark IPOs are at the forefront of AI innovation, each with a distinct focus and track record:
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SpaceX: Founded by Elon Musk in 2002, SpaceX has revolutionized the aerospace industry with its reusable rockets and ambitious plans for space exploration, including its Starlink satellite internet constellation and the development of Starship for Mars colonization. Its IPO is highly anticipated, not only for its AI and space technology aspects but also for the potential of its satellite internet business. The company’s valuation has been a subject of intense interest, with private funding rounds valuing it at tens of billions of dollars.
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Anthropic: Established in 2021 by former members of OpenAI, Anthropic has quickly become a major player in AI safety and research. Its flagship AI model, Claude, is known for its focus on helpful, honest, and harmless outputs. The company has attracted significant investment from major tech firms, underscoring its perceived potential.
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OpenAI: The creator of the groundbreaking ChatGPT and DALL-E models, OpenAI has been a driving force in generative AI. Its research and development have spurred a global surge in interest and investment in AI technologies, making its eventual IPO a highly scrutinized event. The company has a complex corporate structure, initially founded as a non-profit and later establishing a capped-profit arm.
The combined technological prowess and market disruption potential of these three entities have naturally led to questions about how their entry into the public markets will reshape investment landscapes.
Broader Market Implications and Analysis
While Yardeni’s analysis provides a reassuring perspective on liquidity, the IPOs of the AI-3 will undoubtedly have other significant implications for the stock market.
Increased Investment in AI Sector: The influx of capital into these companies through their IPOs will likely spur further investment and innovation across the entire AI sector. Companies that provide AI infrastructure, software, and services could see increased demand and valuation as the broader ecosystem expands.
Sector Rotation: There is a possibility of sector rotation, where investors might reallocate capital from other technology sub-sectors or even from traditional industries into these high-growth AI stocks. This could lead to increased volatility in specific market segments.
Investor Sentiment and Valuation: The market’s reception of these IPOs will be a key indicator of investor sentiment towards AI. Successful and robust IPOs could boost confidence in the long-term prospects of AI, while any hiccups could lead to a more cautious approach. The valuation of these companies will set new benchmarks for AI enterprises.
Competition and Market Dynamics: The public listing of these major AI players will intensify competition within the AI landscape. It could also lead to increased consolidation as larger, publicly traded companies may look to acquire or partner with smaller AI startups to stay competitive.
Economic Growth: The continued advancement and widespread adoption of AI technologies, facilitated by the capital raised through these IPOs, are expected to contribute to productivity gains and economic growth in the coming years. This could have a positive ripple effect across various industries.
Expert and Market Reactions
While Yardeni’s viewpoint offers a counter-narrative to prevailing anxieties, it’s important to acknowledge that other market participants may hold differing opinions. Analysts from investment banks and research firms are actively modeling the potential impact of these IPOs. Their assessments will likely be influenced by factors such as the specific terms of the IPOs, the overall economic climate, and the prevailing investor appetite for growth stocks.
For instance, some analysts might focus on the potential for these companies to command premium valuations due to their perceived disruptive potential, which could still lead to some degree of capital concentration. Others might emphasize the long-term growth trajectory of AI, suggesting that the market has room for multiple large players without causing significant liquidity issues.
The Federal Reserve’s monetary policy stance will also play a crucial role. Interest rate decisions and the overall availability of credit can significantly influence liquidity conditions and investor behavior, irrespective of specific IPO events. As of late 2023 and into early 2024, central banks have been navigating a complex economic environment, balancing inflation concerns with the need to support economic growth. Any shifts in monetary policy could amplify or mitigate the effects of these large IPOs.
Conclusion: A Measured Outlook
Ed Yardeni’s assessment provides a grounded perspective on the potential liquidity impact of the AI-3 IPOs. By emphasizing historical data and the concept of free float, he suggests that the market is robust enough to absorb these significant offerings without succumbing to a liquidity crisis. While the sheer scale and innovative nature of SpaceX, Anthropic, and OpenAI will undoubtedly create ripples across the financial landscape, the evidence points towards a manageable integration rather than a disruptive drain.
The coming months will be crucial in observing how these IPOs unfold and how the market reacts. Investors and market watchers will be closely monitoring not only the capital raised but also the long-term performance of these companies and their influence on the broader economic and technological ecosystem. The prevailing sentiment among many financial experts is one of cautious optimism, recognizing the transformative potential of AI while maintaining a pragmatic view of market dynamics. The narrative of a liquidity drain appears to be an overstatement, with the market poised to adapt and evolve as these AI giants step onto the public stage.
