A Pulse Check on Investor Appetite for Chip Stocks and AI Investments in 2023

The coming week is set to test the market’s appetite for new initial public offerings (IPOs). Arm Holdings (ARM), the chip designer, is readying itself to price its offering on Wednesday and initiate trading on Thursday. This move is expected to emerge as the most prominent IPO of 2023. With an estimated raised amount of $4.7B and a market cap of $50.8B, this deal will outshine the previous $4.4B listing of Johnson & Johnson’s consumer health spinoff, Kenvue (KVUE), in July. This development is poised to be the biggest U.S. IPO since Rivian’s (RIVN) entry in November 2021.

Investment Prospects

Arm’s IPO is the second instance of the company going public; it had its first listing back in 1998 before being bought by SoftBank (OTCPK:SFTBY) for $32B in 2016. Nvidia (NVDA), which previously rode the wave of the AI chip frenzy, had also attempted to acquire Arm for $66B but was met with regulatory disapproval. At present, Arm “estimates that approximately 70% of the world’s population uses Arm-based products” – including devices such as smartphones, PCs, cars, servers, and networking equipment. It predicts its market growth to rise nearly 7% annually, reaching around $247B by 2025’s end.

Market Activity

“We’re seeing some signs of life,” noted Nelson Griggs, the President of Capital Access Platforms at Nasdaq. He explained that significant institutional activity has resurfaced for the first time in 18 months, leading to a surge in M&A activity. This upswing provides a stable base to valuations. There is a lot of action as companies ‘test the waters.’ For investors seeking broader IPO market exposure, the Renaissance IPO ETF (IPO) has witnessed a return of 36% this year, over double the S&P 500’s 16% gain.

Implications and Potential Impact

If the Arm IPO turns out to be a success, it could potentially dismantle the recent IPO stagnation, paving the way for a steady pickup throughout the remaining year and a normalized IPO market by 2024. However, if it fails or is deemed overvalued, the effect might be the exact opposite. The performance of Arm’s IPO will serve as a litmus test for sentiments surrounding computer chips, big data, and artificial intelligence. It will also shed light on investor perceptions of risk factors, including exposure to China and open-source architecture groups.