Is There Still An IPO Market?

The recent IPOs of marquee companies such as Arm and Instacart have revived interest in IPOs, but the results were mixed, at best. What does it say about the future of stocks?

A Good Start to the Race

Ahead of the initial public offerings (IPOs) of two major firms last week, Arm and Instacart (formally known as "Maplebear"), there was some optimism that the IPO market might be in revival mode. There has been an 18-month drought of new companies coming to market ever since the combined impact of the Fed raising rates and the war in Ukraine have left investors wary of taking on too much risk. The low-interest rate environment and positivity of finally putting COVID-19 in the rearview mirror saw investors piling into risky growth stocks at a record rate, allowing IPO to raise the most money ever.

That came to a screeching halt when the Fed started its rate-hiking campaign, and inflation rose dramatically. Traditional IPOs last year raised the lowest amount in over two decades, signalling that appetite from investors for higher-risk assets was depressed in the face of higher borrowing costs. Now, as the Fed signals tightening is nearly over, the cautious launch of the recent IPOs provided some initial optimism for the market, but just days later, it is starting to look like the risk appetite has still not recovered.

The Weak Follow-Through

The Softbank-owned British chip designer Arm had a pretty strong debut on the Nasdaq, popping 25% through the day and ending up with a $65B market cap. But, just days later, it was trading below its IPO price and reportedly was facing strong sell pressure as short sellers were piling on to the firm. The other major names that debuted around the same time had similar results, with Intacart also falling below its IPO price. Although that period also coincided with the Fed's "hawkish pause", in which rates weren't hiked, projections from the central bank showed monetary policy remaining tighter for longer than the market anticipated.

The performance might weigh on the decision of other companies to come to market or spin-off major assets. German premium footwear firm Birkenstock is reportedly still planning to IPO. Novartis recently confirmed it will spin-off its Sandoz generics unit, despite market conditions. But Vietnamese internet provider VNG delayed its IPO in the US, citing "volatility" in the markets in the wake of Arm and Instacart's results. Although analysts point to higher volatility in the wake of an IPO as normal, markets are suggesting this isn't the best environment to bring a company to market. Risk appetite could remain muted for a while, with initial company listings as the most vulnerable to investors looking for safer places to store their assets.

Instacart in Descending Triangle

Maplebear's stock price barely hangs at $30 per share, with its pattern resembling a descending wedge pending more downside. A drop under the quadruple support low could open the door to the triangle's open range, which measures two dollars, at $28. If a low is put in there, only a break of $32 would increase the chances of a revival, opening up $34 and beyond. Otherwise, the decline may continue, hitting the next strong round support at $25.

Source: SpreadEx / MAPLEBEAR

Key Takeaways

The recent IPOs of companies like Arm and Instacart have generated some interest in the IPO market, but both companies ended up trading below their IPO prices just days later, indicating that risk appetite has yet to recover fully. This weak performance may influence other companies' decisions to go public or spin-off major assets. While some companies like Birkenstock and Novartis are still planning to go public or spin off assets, others like VNG have delayed their IPOs due to market volatility. Analysts say that while some volatility after an IPO is normal, the current market environment may not be ideal for companies going public, as risk appetite remains subdued and investors look for safer investments.