A Potential Boost for the Suffering IPO Market

The biggest initial public offering ('IPO') of the year is in the works... Britain-based chip designer Arm filed for its initial public offering on the Nasdaq on August 21. It will trade under the fitting ticker "ARM." Arm – which is currently owned by Japanese tech conglomerate and holding company SoftBank – might not have […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] A Potential Boost for the Suffering IPO Market By Kyle Wehrle --------------------------------------------------------------- [A radical fifth shock to the dollar is coming...]( In economic history, there have been four major events which have shaped America and the economies of the world... The fifth could occur on December 3. And every American (including YOU) stands to be impacted. [Click here for the full story](. --------------------------------------------------------------- The biggest initial public offering ('IPO') of the year is in the works... Britain-based chip designer Arm filed for its initial public offering on the Nasdaq on August 21. It will trade under the fitting ticker "ARM." Arm – which is currently owned by Japanese tech conglomerate and holding company SoftBank – might not have the brand recognition of Nvidia (NVDA) or Microsoft (MSFT), but you almost certainly use its designs every day... This is because Arm is responsible for designing 99% of the chip architecture used in all smartphones. To put that in perspective, there are more than 6.8 billion smartphones worldwide. That amounts to about 85% of the world's population likely using Arm's technology. Arm was able to become the sole supplier of easy-to-use chip designs by licensing out its designs and getting small cuts from each chip built off them. This model differs greatly from Arm's competitors, who run traditional models involving the design, manufacture, and sale of chips. Seeing as SoftBank recently dipped into its $100 billion Vision Fund to buy the remaining 25% stake in Arm it that it didn't directly own for $16 billion, analysts are speculating that SoftBank is aiming for a listing valuation somewhere between $60 billion and $70 billion. That range amounts to around 21 to 25 times annual sales. That compares to Nvidia, which is valued at around 45 times sales... and to other chipmakers, valued in the single digits.(Note that Nvidia is guiding to earn triple year over year for 2023, which lends some credence to its lofty valuation.) Let's consider some historical context... SoftBank had originally acquired Arm for $32 billion back in 2016, before listing it on the London Stock Exchange for $31 billion. About four years later, it attempted to sell Arm to Nvidia for $40 billion. That proposed sale met antitrust issues and was abandoned by Nvidia in February 2022. Why would SoftBank buy Arm – which is known as the U.K. tech industry's crown jewel – only to backtrack on Arm and try to sell it just a few years later? For one, the semiconductor has struggled over the years, ever since the COVID-19 pandemic, but now in the face of other grinding issues like the rising cost of materials, export restrictions, and the grueling war in Ukraine. Months of high inflation, rising costs, and other dampers on consumer confidence have slowed down demand for smartphones, EVs, and other products – hitting Arm's net sales, which were down 4.6% year over year in the second quarter. There's also a new threat coming out of the University of California, Berkeley – Risc-V, an open-source alternative to Arm's chip architecture available to anyone without a license or fee. Risc-V serves the lower end of the market, but experts inside and outside of Arm see it as a growing threat to Arm's traditional source of revenue. --------------------------------------------------------------- Recommended Link: [D.C. Elites Refuse To Talk About This Dollar Threat]( "If you know my work, you know I've blown the lid off a lot of financial stories... including some that got me death threats," explains top financial journalist. "But this could be my biggest story yet." [Click here](... --------------------------------------------------------------- So what's the upside with Arm? The company is moving heavily into artificial intelligence ("AI"). It provides developers with the tools and resources they need to build and deploy AI applications on Arm-based chips. Furthermore, in early August, Nvidia – the greatest beneficiary of the AI revolution – debuted its new Grace Hopper "superchip" for generative AI applications. Grace Hopper is based on Arm architecture, giving Arm a "picks and shovels" model through which to milk the ongoing AI craze. Whether Arm's AI tailwinds will be enough to offset its other headwinds remains to be seen. Either way, there's no denying that Arm's IPO will be the biggest of the year... With a potential $70 billion price tag, it's not even close when it comes to the $13 billion in total IPO value we've seen so far this year, as you can see in the chart below... Both 2022 and 2023 so far have been down years for IPOs, and that's putting it mildly. A superstorm of lingering disruptions from the pandemic, stubbornly high inflation, and skyrocketing interest rates, combined with bitter geopolitics and a gloomy outlook for the global economy, led the IPO market to plummet in 2022 to its lowest level of activity since 1990. And as you can see the chart below, the nosedive came just one year after we saw the highest level of IPO activity in more than 20 years in 2021... And even though the Nasdaq Composite Index has climbed around 35% this year after losing a third of its value in 2022, the IPO market is finding few takers as both venture capitalists and founders suffer liquidity issues. But this might be at the start of a seismic shift... According to financial markets platform Dealogic, deal values for traditional public listings for the start of the year through July 25 have beyond doubled over the same period 2022. Meanwhile, the number of IPOs in the U.S. has jumped more than 25% versus last year. Arm's IPO could be the match that lights the building powder keg that is suppressed IPO interest, as its Nasdaq listing is expected to be the largest IPO since Rivian Automotive's (RIVN) public debut in late 2021. But in order to really stir life into the U.S. IPO market, we'll need to see a few noteworthy IPOs that hit the market at attractive valuations and outperform in the aftermarket. Other notable companies poised to IPO this year are grocery delivery and pick-up service Instacart and social news website and forum Reddit. The internal valuations of Instacart and Reddit were reportedly $10 billion in December 2022 and $17 billion in April 2023, respectively. Indeed, any one of these companies could fuel a resurgence in IPOs... But for our purposes, Arm also serves as a litmus test for ongoing interest in AI. Wait and see how much investor interest Arm's IPO draws, as the company's potential upside story is based almost entirely around AI, the profit potential of AI, and the surrounding craze. If Arm's IPO goes particularly well, we can expect AI to continue dominating headlines and investor interest for the foreseeable future. Regards, Kyle Wehrle August 31, 2023 Editor's note: Empire Financial Research CEO Whitney Tilson says that AI will be the main driver behind everything we do in our lives – from the smartphones we look at 24/7... to medical care... to retail experiences... to banking. In a special presentation, he explains how to best take advantage of this massive transformation – [get the details here](. --------------------------------------------------------------- If someone forwarded you this e-mail and you would like to be added to the Empire Financial Daily e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2023 Empire Financial Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Empire Financial Research, 1125 N. Charles Street, Baltimore, Maryland 21201 [www.empirefinancialresearch.com.]( You received this e-mail because you are subscribed to Empire Financial Daily. 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