Arm Can Trigger a US Stock IPO Boom? Wall Street Throws Cold Water: It's Too Early!

According to Dolphin Research APP, the highly anticipated initial public offering (IPO) of Arm has sparked hopes that the struggling new stock issuance market will regain vitality. However, a group of Wall Street professionals claim that it won't happen so quickly.

They believe that all the issues that have hindered the IPO market in the past 18 months - from the aggressive Federal Reserve to the threat of global economic recession - still exist. Unlike other companies seeking IPOs, Arm's fundraising target is only a small portion of its overall value. In comparison, Arm is a large-scale company with sales of $2.68 billion and net income of $524 million last year. More importantly, it has entered the fiercely competitive field of artificial intelligence.

For other companies hoping to go public, a successful IPO by Arm, backed by SoftBank Group, would be a sign that investors are once again open to new stock issuances. However, there are still other obstacles. The recent rise in US Treasury yields has once again raised concerns that the long-predicted credit tightening will become a reality and cause economic activity to stagnate. In addition, the stock market decline in August has led to calls for selectivity, targeting companies with strong balance sheets, but these companies are not necessarily representative of late-stage startups.

As shown in the figure below, the IPO window in the United States has been largely closed since the beginning of last year.

David DiPietro, Head of Private Equity at T. Rowe Price, said, "If Arm goes smoothly, I just don't think it will bring the kind of excitement that benefits all other companies. This sentiment is driven to a greater extent by the overall market background, and as the market retreats, it becomes more cautious than it was about a month ago."

It is understood that only $14.4 billion has been raised through IPOs on US exchanges this year, with spin-offs, consumer-facing companies, and SPACs accounting for the majority of new stock issuances. However, Arm's entry will push this number higher, reminiscent of listed companies like Meta Platforms (META.US), which accounted for a significant portion of fundraising in the relatively lackluster year of 2012.

Arm aims to raise $8 billion to $10 billion, but this target may be lowered due to SoftBank's decision to hold more shares in the company. Nevertheless, it is expected to be the largest IPO this year and may open the door for companies that have been waiting to go public. Wall Street predicts that online grocery delivery company Instacart Inc., marketing and data automation provider Klaviyo, and footwear manufacturer Birkenstock may follow Arm's application for listing. But these big companies have more ability to overcome potential uncertainties. Concerns about economic recession and its impact on different industries and companies will make companies focus on the end of this year or next year. Mike Bellin, Head of IPO Services at PwC, referred to these companies raising $200 million to $400 million as the "core" of the IPO market.

He said on the phone: "The majority of companies in the IPO market are not in the same category as some companies that may start the IPO process in the coming weeks. They will closely monitor these companies, and if they trade successfully, it will help support their processes and timelines, but most of them will be later in 2023 or 2024."

Overall, potential issuers face investors who are frustrated with ongoing losses and hope to get significant discounts compared to recent rounds of financing.

According to a survey by KKR & Co. Inc., 43% of investors among buyers with assets over $10 trillion hope that the stock price of IPO candidates will be 20% to 30% lower than that of listed companies, so that they can feel confident about their investments. Most importantly, IPOs in 2020 and 2021 are still significantly in the red - the Renaissance IPO ET has dropped nearly 60% from its peak in February 2021.