When the British chip group ARM entered the American technology stock exchange Nasdaq last week, the stock exchange world held its breath. It was the largest IPO in almost two years and therefore a good indicator for the IPO market. It is going through a particularly lean period due to high inflation and interest rate increases. Especially in Europe, companies are remarkably reluctant to accept so-called IPOs (initial public offerings).
The price of ARM (annual turnover 2.7 billion dollars, more than 2.5 billion euros) initially got off to a good start. The hyped share closed almost 25 percent higher at the end of the first trading day, at more than 63 dollars. Only to drop sharply in the following days, to now more than 50 dollars. That decline started after a critical report from investment bank Bernstein, which immediately lowered ARM’s rating to ‘underperform’ with a recommended retail price of $46. That is 10 percent lower than the $51 at which ARM priced the share at the IPO.
Bernstein is particularly critical of the high expectations that ARM sets for itself in the field of artificial intelligence. ARM does not produce chips itself, but designs the architecture of processors that manufacturers license. ARM designs are energy efficient and relatively cheap, giving the company a dominant market share in smartphones and networking equipment. The list of customers is long and impressive: Apple, Google, Samsung, TSMC, Qualcomm and many others. ARM not only sells licenses, but also earns from royalties that chip makers pay per chip sold.
But ARM is not yet dominant in the market for artificial intelligence (AI) and the so-called Internet of Things (the wireless connection of electrical devices and machines to the internet). “We think it’s too early to declare them winners in AI,” Sara Russo, the Bernstein analyst who wrote the critical report, told NRC. “The problem is that we do not yet know how AI takes shape in innovative technological applications.” Russo also points to the “low single-digit growth” expected in the mobile and consumer device market, which accounted for nearly 60 percent of ARM’s revenue last year. “We therefore believe that ARM will have to charge higher royalty rates to achieve the revenue growth outlined in the IPO.” The analyst does see ARM benefiting from AI in the longer term.
In addition, there is competition from the emerging RISC-V chip architecture, which is available as open source software (open source) is offered freely available. RISC-V could become a problem for ARM if it faces export restrictions to China, where ARM now generates a quarter of its turnover. These limitations are threatened by the ongoing technological power struggle between America and China.
Billions raised
Nevertheless, we can speak of a successful IPO. ARM owner SoftBank, the Japanese venture investor, said Tuesday it will make $5.12 billion from the stock sale. A group of key ARM customers and partners, including Apple, Google and Nvidia, purchased a combined $735 million worth of ARM shares as part of the stock market listing. That support was important for the IPO, says analyst Marc Hesselink, who follows the tech sector at ING. “ARM has packaged the IPO well to make it a success. They have tested the market well in advance, as they say.”
This does not alter the fact that ARM owner SoftBank retains the majority of the company. The Japanese venture investor sold 95.5 million shares, but will retain a stake of more than 90 percent in ARM after the IPO. The same pattern is visible with the Instacart IPO. That California grocery delivery company also made only 10 percent of its shares tradable on Tuesday. Instacart raised $660 million, but saw its share price fall after an initial rise in the following days.
The question now is whether the second successful IPO will inspire more companies with stock exchange plans in a short time. “Companies absolutely look at each other,” says ING analyst Hesselink. “Usually large companies are the first to dare to make an IPO. Because they automatically get more attention. The IPOs of ARM and Instacart at least give some confidence again. At a certain point, companies with stock exchange plans want to go.” Although, according to him, the price drops are not a good sign. Hesselink: “Suppose you are a major investor who has just invested in these two IPOs, then you are immediately at a disadvantage. That gives you less comfort in participating in the next IPO.”
It is already known that the German sandal manufacturer Birkenstock will enter the American stock market this month. The almost 250-year-old company (annual turnover 1.34 billion euros) completed the necessary paperwork last week and, according to business news agency Bloomberg, expects a stock market value of more than 8 billion dollars (about 7.5 billion euros). Birkenstock has been owned by the American investment company L Catterton since 2021, which sees an opportunity now that sales figures have been on the rise in recent years. These sales received an extra boost this summer due to the successful cinema film Barbie, in which lead actress Margot Robbie chooses a pair of average brown Birkenstock sandals over shiny pink high heels in a much-discussed scene. Investor L Catterton raised more than $400 million in July with the IPO of online beauty products store Oddity Tech.
Car sharing company Turo has also not given up on its long-standing trade fair plans. Turo, a platform on which private owners can rent out their own cars, is stepping in according to Bloomberg to the stock exchange this fall, at the earliest in October. The American company (almost $750 million in turnover) presents itself as the Airbnb for cars and has raised around $500 million from investors since its founding in 2009. Turo is currently only active in the United States, Canada, Australia and the United Kingdom.
In November, a billion-dollar IPO may follow in Amsterdam for the first time in a long time. Europe’s largest private equity firm CVC Capital Partners has been considering a stock exchange listing for some time, but has postponed it several times due to the disappointing stock market climate. The British business newspaper Financial Times (FT) unveiled last month that CVC now sees favorable prospects on the stock exchange. This also applies to the German transport company Flix, known for the intercity buses FlixBus and Greyhound. Flix is preparing for an IPO on the Frankfurt stock exchange in 2024, which should reportedly raise the company more than $4 billion.
Chance of a recession
“Some life is coming back,” says Jos Versteeg, stock analyst at InsingerGilissen, about the current climate for IPOs. “The sentiment on the stock exchange is always difficult for a company to estimate. The financial markets have now priced in that there will be no recession in America. But you can question this now that the confidence that purchasing managers have in the economy is declining and bank lending has become more difficult. I can hardly imagine that there won’t be a recession. That’s not a good time for IPOs.”
In addition, stress can always arise unexpectedly in the financial sector. Consider the bank run that led to the collapse of the American Silicon Valley Bank (SVB) in March, which was followed by more banks and the scandal-plagued Swiss Credit Suisse ultimately had to be rescued by UBS. Versteeg: “Furthermore, the rising oil price could throw a spanner in the works and central banks could dampen the economy too hard.” The US central bank (Fed) decided on Wednesday not to raise interest rates further, but did not rule out another interest rate increase later this year if inflation does not fall sufficiently.
For the time being, companies with stock market ambitions are watching with suspicion how others are faring. The price jump (+23 percent) of the American automation platform Klaviyo, which debuted on the New York Stock Exchange on Wednesday and is currently valued at $8.5 billion, is encouraging in that respect. Or will there also soon be a price drop?
A version of this article also appeared in the September 23, 2023 newspaper.