The Stock Market Hopes Arm’s IPO Is a Hit

Call it Wall Street’s Groundhog Day.

When shares of Arm, the British chip designer, begin trading on the Nasdaq stock exchange on Thursday in the year’s biggest initial public offering, investors, tech executives, bankers and start-up founders will be watching closely for how it performs.

If Arm’s stock falls, they will know that the market for I.P.O.s is likely to stay frozen for longer. But a warm welcome for the shares could entice many more companies to go public in the coming months, ending the cold streak.

“Offerings like this are often beacons to try to decipher what is the sentiment, overall, of this marketplace,” said David Hsu, a professor of management at the Wharton School at the University of Pennsylvania.

Arm is the largest company to brave the public markets in 2023, a year that has been almost deathly quiet for I.P.O.s. The chip designer, which is owned by SoftBank, priced its offering on Wednesday at $51 a share, raising $4.87 billion and valuing the company at $54.5 billion.

That stands out in a year that has been the worst for I.P.O.s since 2009, according to an analysis by EquityZen, a marketplace for private company stock. So far this year, 73 I.P.O.s in the United States — including Arm — have raised $14.8 billion, according to Renaissance Capital, which tracks public offerings. That’s a fraction of the listings during 2021, when 397 companies raised $142 billion.

Arm is a particularly interesting test of the public market because it provides an essential technology that is geopolitically and strategically coveted, which also means it faces challenges.

Founded in 1990 in Cambridge, England, the company sells blueprints of a part of a chip known as a processor core. Its customers include many of the world’s largest tech companies, like Apple, Google, Samsung and Nvidia.

Arm’s chip designs are primarily used in smartphones, but the company has pitched itself as able to ride the wave of artificial intelligence sweeping Silicon Valley. Many A.I. companies need the most advanced computer chips to do the sophisticated calculations required to develop the tech.

Arm has been the subject of much global interest, with Japan-based SoftBank buying the company for $32 billion in 2016. SoftBank, which needs a big win after years of deals that didn’t live up to their promise, is set to retain a majority stake in Arm after the I.P.O.

In 2020, Nvidia reached a deal to buy Arm from SoftBank for $40 billion. But that plan collapsed 18 months later after opposition from regulators and customers.

Investors remain cautious to skeptical about other tech companies that are readying to go public, with expectations low. Next week, the grocery delivery company Instacart and the marketing technology company Klaviyo are also expected to begin trading on the public market.

Yet Instacart, which kicked off its I.P.O. pitch meetings this week by setting a price range that valued the company at $8.6 billion to $9.3 billion, counting all outstanding shares, is set to be valued far below its onetime valuation of $39 billion in the private market. Klaviyo started its pitch meetings with a valuation range of $7.7 billion to $8.3 billion, slightly below its last private valuation of $9.5 billion.

To instill confidence in the public offerings, many of the companies have tried reassuring Wall Street that they are desirable investments. Before its offering, Arm said it had lined up $735 million of “stated interest” in buying its shares from companies it works with, including Nvidia, Google, Samsung, Apple and Intel.

Instacart made a similar move, selling $175 million of its I.P.O. shares to PepsiCo. Klaviyo also announced that it had secured the investment firms BlackRock and AllianceBernstein as “cornerstone” investors ahead of its offering. Trumpeting such commitments ahead of an I.P.O. is not as common in times when the market is flush, Mr. Hsu of Wharton said.

Arm, Klaviyo and Instacart have also drawn attention to their profits. Rising interest rates and inflation have made investors more risk-averse, with many shifting their priorities from fast-growing companies to those that can make money.

The profits contrast with the many cash-burning companies that went public in the boom times of 2021, which have since seen their stock prices plummet. Bird, a scooter company once worth $2.5 billion, has fallen to a valuation of $11 million. WeWork, the office sharing company that was valued at $40 billion on the private market, now trades at a market capitalization of around $270 million.

Don Clark contributed reporting.