Hi Everyone 👋,

This week was action-packed with a big IPO and CPI data.

Arm finally opened the IPO door that has been closed for quite some time now.

Investors again scoured CPI for clues as to what the Fed’s next move will be. Despite a hotter-than-anticipated print, the picture didn’t change much for the Fed’s projected path going forward.

It’s the battle of rates vs. growth again, all highlighted over the course of one week.

• IPO Door Opening 👉 Arm

• CPI Data a Bit Hot👉 Muted Market Reaction

Let’s get started!

1. IPO Door Opening 👉 Arm

This week, we had a high-profile IPO come to market after a very long drought. There hasn’t been a notable venture-backed tech IPO since November of 2021 when software HashiCorp held its debut. Next week, we’re anticipating to get another, with Klaviyo expecting to trade around Sept 20. We’re also slated for Instacart within the next couple of weeks.

There is a massive chasm right now between public and private markets and investors are trying to figure it all out.

While the public market is a real-time pricing mechanism, the private market is much more opaque because there is no “mark”. We don’t know the value of private companies until they do a round of financing which gives us a new mark.

Companies are also very hesitant to do a “down-round”, which is a financing that is done at a lower valuation than previous rounds. In the tech boom over the last couple of decades, a down-round was a kiss of death.

Current valuations in the private market are incredibly stale due to a collapse in public equity valuations that private investors commonly use as “comps” in order to get some level of valuation based on an EV/R (enterprise value to revenue) or EV/EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple.

Lucky for private companies, they have the element of timing on their side. If they have sufficient cash runway, they don’t have to raise at a “down-round” because they can just wait until conditions improve. There’s no point in coming to the public markets in periods of multiple compression as the company won’t fetch the high valuation it is looking for.

So, it just waits.

And that’s what companies have been doing. Until now.

This week, we got a major IPO with Arm coming to market.

Arm designs the core CPU components and licenses the IP to partner organizations, which then build arm-based chips according to their own requirements. Arm does not actually manufacture or sell any chips directly.

I am now working on a deep dive on Arm that will hit your inbox in a couple of weeks, so for this week, let’s just go over how the IPO went.

Arm IPO

Here is a screenshot of key info around the offering:

Arm has been public before. Back in 2016, Softbank took the company private off of the London Stock Exchange, buying it for $32B. Masa Son’s plan here, which ultimately fell short of expectations, was to sell services to help coordinate and deliver software to billions of devices equipped with Arm chips.

In September 2020, Nvidia reached a deal to buy Arm from SoftBank for $40B. That plan collapsed 18 months later under a mountain of opposition from regulators and customers.

As recently as August 2023, Softbank acquired the 25% stake in Arm that it did not directly own from its Vision Fund unit in a deal that valued the company at $64B.

Arm priced the IPO the day before it traded at the high end of the range ($51/sh), implying a valuation of $52B. The book was 10x oversubscribed, which means absolutely nothing because institutions pad their orders to increase their allocations.

The stock then opened with its first trade at $56.10, then closed at $63.59 (market cap of $65B). Looks like this result is about as good as it could possibly get for Softbank. Where it goes from here is anyone’s guess.

Hopefully, Arm can buck the recent trend of post-IPO performance, but at its lofty valuation out of the gate, it’s anyone’s guess…

The 10 biggest U.S. initial public offerings (IPOs) of the past four years are down an average of 47% from the closing price on their first day of trading.

Keep your eyes peeled for my deep dive into the company in the coming weeks.

2. CPI Data a Bit Hot👉 Muted Market Reaction

Shifting gears, the market was also glued to the CPI print to try to get a read on where rates are going and how to position accordingly. Hotter inflation = higher for longer rates. With energy prices back up, a higher reading was anticipated.

The CPI figure on Wednesday came in a bitter hotter than expected. Headline CPI rose +0.63% in August, putting the YoY headline gain at +3.7% (vs. expectations of 3.6%). The core CPI advanced +0.3%, which translates into a +4.3% YoY gain.

Gasoline prices jumped +10.6% in August and electricity prices rebounded. Food prices grew +0.2%. Food at home price gains were smaller than restaurant price gains. In the “core space”, prices for new vehicles, medical care commodities and services, clothing, and airfares witnessed rising sequential prices.

Rent gains are slowing, as over the past three months they are up just 5% (annual rate). Core service prices ex shelter rose +4.1% y/y, or +0.5% m/m. Motor vehicle insurance and repair are surging.

While the headline figure came in a bit hotter than expected, risk assets shrugged off the print and ended up slightly up on the day.

The print does not change the market narrative on Fed strategy. OIS forwards still indicate a pause for Sep and a ~35% probability of a hike in November.

Wrapping Up…

With a hot IPO hitting the tape at the same time that we got hotter-than-expected inflation data, the tug of war continues: Rates vs. Growth.

Despite rates remaining higher for longer, technology stocks have had a gangbuster rebound in 2023. Yet, despite this rebound in multiples, we didn’t see the IPO window open back up until this week.

While CPI was a bit higher than expected, some—including JPM Morgan—are making the call that there will be no further rate hikes this cycle.

What do you think? Is the hiking cycle over?

Until next time. Always Yours. Incessantly Chasing ROI.

Sources:

1 Reuters: For retail investors, jumping on Arm's blockbuster IPO is a risky business (Sept, 2023): https://www.reuters.com/markets/deals/retail-investors-jumping-arms-blockbuster-ipo-is-risky-business-2023-09-11/

2 US Bureau of Labor Statistics (September, 2023): https://www.bls.gov/cpi/

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