Wall Street Breakfast: Spheres Of Influence

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IPO appetite

Investors this week will get to see how hungry the market is for new IPOs. Chip designer Arm Holdings (ARM) is set to price its offering on Wednesday, and begin trading on Thursday, in what is poised to become the biggest initial public offering for all of 2023. The mega deal will likely raise $4.7B at a $50.8B market cap, topping the $4.4B listing of Johnson & Johnson consumer health spinoff Kenvue (KVUE) in July, and marking the largest U.S. IPO since EV maker Rivian (RIVN) in November 2021.

Favorable investment? Arm’s IPO will mark the second time the company has gone public, with the firm’s first listing taking place in 1998, before SoftBank (OTCPK:SFTBY) bought it for $32B in 2016. Nvidia (NVDA), which has ridden the AI chip frenzy wave, also previously tried to buy Arm for $66B before getting the thumbs-down from regulators. Arm currently “estimates that approximately 70% of the world’s population uses Arm-based products” – including those used in smartphones, PCs, cars, servers, and networking equipment – and expects its market to grow by nearly 7% a year to reach around $247B by the end of 2025.

“We’re seeing some signs of life,” declared Nelson Griggs, President of Capital Access Platforms at Nasdaq. “For the first time in 18 months, we’re seeing significant institutional activity… We’re having a pickup in M&A, which gives a floor to valuations… and we are very active in pitching as companies test the waters.” For those looking for exposure to the broader IPO market, the Renaissance IPO ETF (IPO) has returned 36% this year, more than double the 16% gain of the S&P 500.

What to watch: If the Arm IPO does well, it could be the deal that breaks the recent IPO logjam, leading to a gradual pickup for the rest of the year and a normalized IPO market in 2024. However, it may have the opposite effect if it flops or is overvalued. Arm’s IPO will also be a barometer of the sentiment surrounding computer chips, big data and artificial intelligence, as well as investor opinions on risk factors like exposure to China and open-source architecture groups. Take the WSB survey.

All in on AI

As the artificial intelligence race intensifies, Meta Platforms (META) is reportedly developing a new AI model aimed to be as strong as OpenAI’s latest ChatGPT version called GPT-4. The new model will also be more powerful than Llama 2, with training for the open-source AI model – developed by Meta’s top-level AI product group – expected to start in early 2024. The news comes ahead of Congressional hearings this week on AI, as U.S. lawmakers seek to understand the technology. While Meta’s AI offerings have improved its monetization, SA analyst Juxtaposed Ideas warned that AI-related capex could reverse the company’s Year Of Efficiency. (1 comment)

Twinkie time

J.M. Smucker (SJM) is nearing a deal to buy Hostess Brands (TWNK) for around $4B that could be announced as soon as today. The company is said to have prevailed in a heated bidding competition with Cheerios parent General Mills (GIS), while Mondelez (MDLZ) and PepsiCo (PEP) had also expressed interest. Hostess shares have more than doubled over the past five years, far outpacing the S&P 500 and other big food companies. The Twinkies maker has had a bit of a checkered past though, twice filing for bankruptcy, before it was acquired for $410M by Apollo Global (APO) and C. Dean Metropoulos in 2014. Hostess returned to the stock market in 2016 through a SPAC deal. (6 comments)

Looking good

Treasury Secretary Janet Yellen is more confident of the U.S. economy achieving a soft landing, after recent data showed a steady cooling of inflation and an increase in jobseekers. “Every measure of inflation is on the road down,” Yellen said in an interview en route back from attending the G20 summit in New Delhi. Note that while the headline monthly inflation rate has been at ~2.5% in the past couple of months, other measures that strip out volatile food and energy prices remain elevated. Even so, economists are revising their calls for a U.S. recession, including Goldman Sachs. “With the Federal Reserve’s rate-hike cycle likely concluded and the disinflationary trend intact, a soft landing is looking more probable with each passing month,” added SA Investing Group Leader Lawrence Fuller. (4 comments)