Despite a rocky 2023 for companies going public, the Nasdaq is still on pace to lead new listings for the fifth straight year, according to Dealogic. University of Florida Finance Professor Jay Ritter joins Yahoo Finance's Rachelle Akuffo to discuss the IPO outlook for 2024.

When examining IPO potential, Ritter focuses on sales traction as a key factor. He notes companies with over $100 million in revenue perform better, on average, for investors versus those that have less than that, with bio-pharmaceutical start-ups being the "one exception."

Since 2021's boom, Ritter notes there's been "very little IPO activity" beyond small, micro-cap companies with "very little in the way of sales." But he believes in 2024, "we're going to be seeing more and more quality companies going public" as economic uncertainty clears.

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Video Transcript

RACHELLE AKUFFO: Well, it was largely a difficult year for 2023 public debuts, but there may be a silver lining come to 2024. New data from Dealogic says that for the fifth year in a row the NASDAQ is likely to supplant the New York Stock Exchange as the exchange to list on. IPOs listing on the NASDAQ were able to raise $13.6 billion compared to companies that listed on the NYSE, that were only able to raise $10.4 billion.

Let's bring in Jay Ritter, University of Florida finance professor and IPO expert, to discuss this. Thank you for joining me in this morning. So when you're looking at what makes for a-- when we're looking at what makes for a quality IPO, what are some of the factors that you look at, including perhaps where they're listing?

JAY RITTER: OK. The main thing that I look at is sales. Does a company have demonstrated ability to sell goods or services to consumers or other companies? Historically, companies that go public with less than $100 million in sales have been disappointments to investors on average.

Those that have gone public when they're more mature have done well on average for investors. One exception, of course, is biopharmaceutical startups, almost all of which have no revenue from product sales. But even there, on average, they've been a bit of disappointment.

RACHELLE AKUFFO: So, Jay, how has the appetite changed? Obviously, when you think of the heydays of WeWork, when a lot of these banks and investors were throwing money, how mature is the market now, especially in the higher for longer interest rate environment?

JAY RITTER: Well, what we've seen, that the last two years, after the boom in 2021, is very little IPO activity, and quite a large proportion of the operating companies going public have been micro-cap stocks, the kind of companies with very little in the way of sales. Some of them have rocketed up on the first day of trading and then collapsed. Others have collapsed starting on the first day of trading.

But what I think we're going to be seeing in 2024 is very similar to what we saw after the internet bubble burst more than 20 years ago, after the global financial crisis of 2008. In both of those cases and the last two years, there's been very little IPO activity for a couple of years, and then things have gradually built up, returning to normal. And it looks like 2024 is on exactly that same path where we're going to be seeing more and more quality companies going public.

RACHELLE AKUFFO: And, Jay, it really does run the gamut in terms of some of the companies that could potentially or at least have shown interest in listing next year. Shein, you have Waystar, you have Reddit, SKIMS. So how are you really-- when you look at the IPO market here, what is the best way to think about investing in this space and the ones that you think have the most potential?

JAY RITTER: Well, as I mentioned companies, with major sales, and all of those companies that you just mentioned are in the category of companies with significant sales. On average, they've done about as well as other stocks. Some of them have turned out to be big winners in the long run. Some have turned out to be disappointments. But-- but it's the smaller companies that have struggled for investors.

I also look at profitability, especially for the smaller companies. If they're small and unprofitable, that's been a very bad sign of the future returns. For the bigger companies, whether they're profitable or not at the time of the IPO doesn't matter too much. And, historically, tech companies have done very well in the US.