It’s reminiscent of a recurring movie plot, a Wall Street Groundhog Day.
When Arm, the renowned British chip designer, makes its debut on the Nasdaq stock exchange in this year’s largest initial public offering (IPO), a diverse audience, including investors, tech industry leaders, bankers, and startup founders, will be closely monitoring its performance.
The significance of Arm’s stock performance is clear. A decline in its share price would suggest that the IPO market is likely to remain stagnant for an extended period. Conversely, a warm reception for Arm’s shares could spark a wave of companies going public in the upcoming months, breaking the current cold streak.
David Hsu, a professor of management at the Wharton School at the University of Pennsylvania, remarked, “Offerings like this are often beacons to try to decipher what is the sentiment, overall, of this marketplace.”
Arm stands out as the largest company to venture into the public markets in 2023, a year that has been remarkably quiet for IPOs. Owned by SoftBank, the chip designer priced its offering at $51 per share, raising $4.87 billion and placing the company’s valuation at $54.5 billion.
This stands in stark contrast to a year that has seen the worst IPO performance since 2009, according to EquityZen, a marketplace for private company stock. To date, 73 IPOs in the United States, including Arm, have raised a total of $14.8 billion, a mere fraction of the activity witnessed in 2021 when 397 companies raised $142 billion.
Arm is a particularly compelling litmus test for the public market due to its role in providing essential technology that is geopolitically and strategically coveted, which also exposes it to unique challenges.
Founded in 1990 in Cambridge, England, Arm licenses processor core blueprints, counting major tech giants like Apple, Google, Samsung, and Nvidia among its customers. Although Arm’s chip designs are predominantly used in smartphones, the company has positioned itself as well-suited to the burgeoning field of artificial intelligence, catering to AI companies requiring advanced computer chips for complex calculations.
Arm has garnered global interest, with SoftBank acquiring the company for $32 billion in 2016. After a failed attempt by Nvidia to purchase Arm for $40 billion in 2020, SoftBank retains a majority stake in Arm after the IPO.
Investor sentiment remains cautious, if not skeptical, regarding other tech companies preparing to go public. Next week, grocery delivery firm Instacart and marketing technology company Klaviyo are expected to debut on the public market.
Instacart, initially valued at $39 billion in the private market, is set to be valued significantly lower at $8.6 billion to $9.3 billion in its IPO. Klaviyo, which had a last private valuation of $9.5 billion, started with a valuation range of $7.7 billion to $8.3 billion in its IPO pitch.
To instill confidence in these public offerings, many companies have sought to reassure Wall Street about their attractiveness as investments. Arm, for instance, secured $735 million in “stated interest” from companies it collaborates with, including Nvidia, Google, Samsung, Apple, and Intel, before its offering.
Instacart followed suit by selling $175 million of its IPO shares to PepsiCo, while Klaviyo secured investments from prominent firms BlackRock and AllianceBernstein ahead of its offering. Such pre-IPO commitments are not as common during bull markets, according to Mr. Hsu of Wharton.
Furthermore, Arm, Klaviyo, and Instacart have emphasized their profitability. Rising interest rates and inflation have made investors more risk-averse, with a shift in focus from high-growth companies to those demonstrating profitability.
This contrasts with the trend in the booming IPO market of 2021, where many cash-burning companies went public only to see their stock prices plummet. For instance, Bird, once valued at $2.5 billion, has now dwindled to a mere $11 million, and WeWork, initially valued at $40 billion in the private market, now has a market capitalization of around $270 million.