A flood of new shares from companies looking to fund their artificial intelligence ambitions is raising questions on Wall Street about whether there will be enough buyers to soak them all up and what this pile of fresh equity will mean for stock prices more broadly.
Still, Wall Street pros are confident the demand ultimately will be there when those new shares are available.
“There is plenty of capital available to absorb not just this year’s IPOs, but also primary stock offerings by already public companies in need of cash to build out AI,” Nicholas Colas, co-founder of DataTrek Research, wrote in a note to clients last week.
Historically, large IPOs with average initial floats of less than 10% of outstanding shares see that figure balloon to around 46% a year after their debuts, according to data compiled by Goldman Sachs. That would mean roughly $1 trillion of new equity supply by 2027, in addition to any direct corporate issuance, Goldman strategists led by Ben Snider wrote in a research note dated May 29.
“Once those companies are fully in the market, it’s going to create quite a shock,” said Allianz Trade’s Kuhanathan.
The flipside, of course, is index funds will also have to trim current positions to make room for new entrants when they eventually join the indexes, according to Research Affiliates founder Rob Arnott. If they continue to float shares over time, smaller firms could see their index weights erode gradually, he said.
“These behemoth IPOs will rapidly take up both the market share of benchmarks and the mindshare of retail investors,” said Max Gokhman, senior vice president at Franklin Templeton Investment Solutions. “But once the lockups end and the floodgates open for employees and venture investors to realize significant wealth, the marginal selling pressure can upset an already fragile setup.”
The erosion Arnott warns about could go beyond old economy companies and small stocks. The AI boom has been different than past euphoric periods because investors haven’t been able to buy the firms driving so much of the action: OpenAI and Anthropic. Instead, they’ve been forced to pour money into companies that are close to them as customers, partners or both.
The catch is, once the startups most responsible for AI have publicly traded shares, investors are likely to sell many of these positions and use their profits to buy into Anthropic, OpenAI or SpaceX, according to Nigel Green, chief investment officer at DeVere Group.
“Investors have spent years buying proxies because they couldn’t buy the assets directly,” said Green. “If investors can eventually own OpenAI itself, some of the scarcity value attached to that relationship inevitably changes.”
Of course, there’s always a risk that investors will balk at paying steep prices to own new shares of money losing companies.
“It isn’t all going to be sunshine and rainbows,” said Anthony Saglimbene, chief market strategist at Ameriprise. “They’re going public in an environment where expectations are so high that there’s little room for error. And they’re going public at such large sizes that investors will be less forgiving over the next 12 months.”
