What a crop of upcoming IPOs from Birkenstock to Instacart tells us about the economy
Here's another sign of growing confidence in the stock market and the broader U.S. economy: Companies from Birkenstock to Instacart are getting ready to go public through IPOs after a long lull in high-profile listings.
First up is chip designer Arm Holdings, which is set to make its debut on the Nasdaq on Thursday. It priced its shares at $51 each at its initial public offering, which would value the company at almost $55 billion.
Arm may not be a household name, but it's a multi-billion-dollar tech company that designs many of the high-end microchips that power smart phones and supercomputers.
Wall Street hopes Arm will revive the market for initial public offerings — often seen as a key gauge of confidence in markets.
IPOs dried up last year, amid fears the Federal Reserve's aggressive interest hikes would spark a recession
And the drought has continued in 2023. There have been just 17 new listings on the New York Stock Exchange, for example. Last year, there were 24. In 2021, there were almost 300.
Other companies are expected to follow in Arm's footsteps with public listings, including the grocery delivery company Instacart and the German sandal maker Birkenstock.
Why is a revival in IPOs important?
A revival in IPOs is a clear indication that investors are growing confident about the market's prospects.
Since January, stocks have been on a tear. The broad-based S&P 500 is up more than 15% year to date, and the tech-heavy Nasdaq has risen by more than 30%.
The economy has proven to be far sturdier than expected. Growth in the labor market has moderated some, but overall, it's pretty healthy. And consumer spending has stayed pretty strong.
That has sharply reduced the odds of a recession according to economists at some of the biggest banks, including Goldman Sachs, which puts the odds of a recession over the next 12 months at just 15%. Neither Bank of America or JPMorgan Chase expects a recession this year.
But it's not just the economy. Interest in artificial intelligence has also propelled stocks higher, and that has helped Arm given its plans to expand into AI.
A big IPO, like Arm's, can be catalytic, according to Robert Profusek, the global chair of mergers and acquisitions at the law firm Jones Day.
"The assumption is, if you can get something really, really big done, there's demand," he says.
What other companies are waiting in the wings?
It's not just Arm.
Instacart and Klaviyo, a Boston-based technology company, have filed paperwork to go public.
And this week, they were joined by Birkenstock, a centuries-old shoemaker with a loyal following that specializes in cork-soled sandals of debatable fashionableness.
In recent years, the shoemaker has tried to shake its hippie reputation, partnering with some well-known designers, including Dior and Manolo Blahnik. Birkenstock hopes an IPO will help it grow its customer base even more.
And there's a longer list in the pipeline.
Liquid Death, which sells canned water, is also reportedly considering an IPO.
Still, caution prevails overall. Analysts are not expecting a flood of IPOs yet, and investors and companies thinking about going public will also want to see how Arm does after it debuts on Thursday.
"We want to see a good reception and stability in the secondary market," says Chris Yung, an IPO expert at the University of Virginia's McIntire School of Commerce.
What are the things to watch for the rest of the year?
Whether IPOs dramatically ramp up or not will also largely depend on the health of the economy.
Although recession fears have faded, they have not disappeared. Roughly a fifth of economists recently surveyed by the National Association for Business Economics believe the U.S. is already in a recession, or will be in one by the end of this year.
The Fed is widely expected to pause interest rate hikes at its meeting next week. But the prospect of more rate hikes later this year is still on the table, given that inflation is moderating but not as fast as the central bank would like.
That makes today's climate far different than it was in 2021, when there were more than 1,000 IPOs in the U.S.
Back then, interest rates were near zero, and investors felt comfortable making big bets on companies that weren't yet profitable, but had big aspirations to grow. That led to sky-high valuations that have since fallen down to earth.
According to Rachel Gerring, a partner at the consulting firm EY, investors are now interested in companies that are profitable or are on track to becoming profitable.
"It's not a growth-at-all-costs environment today," she says.
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