What Arm and Birkenstock tell us about state of global IPO market

Big IPOs on the heels of Birkenstock Holding (NYSE:BIRK) and chip designer ARM Holdings ADR (NASDAQ:ARM) are looking less likely as investors continue to show their reluctance to stomach lofty valuations.

PwC said this week that a stable economic outlook and narrowing of the gap in expectations between issuers and investors are needed before a significant pick up in IPO activity.

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The advisory firm reported a slightly busier third quarter for new listings, but the overall picture is subdued compared with the bumper haul of IPOs seen during 2021, when the likes of Darktrace (LSE:DARK), Dr. Martens (LSE:DOCS), Moonpig (LSE:MOON) and Trustpilot (LSE:TRST) joined the London market.

The disappointing level of IPO action comes even though secondary markets are showing there is plenty of money ready to be deployed into public markets.

The financial services firm adds that investors will be looking for a track record of positive post-IPO performance before taking the plunge on future new listings.

However, there are signs that selling shareholders have begun to accept the need for lower IPO valuations than had been seen in their earlier funding rounds.

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This was the case for Arm Holdings, which was valued at $54.5 billion at its September IPO against $64 billion when owner SoftBank acquired the 25% stake it did not already own.

Arm’s IPO was priced at the top end of its indicative range at $51 a share, eventually closing its first day of trading 25% higher at $63.59 a share.

The euphoria around Wall Street’s biggest IPO since Rivian Automotive Inc Class A (NASDAQ:RIVN) two years earlier quickly faded, however, as jitters over higher-for-longer interest rates contributed to shares falling back to near their starting point.

They opened today’s session still higher overall at $54.68, with the Cambridge-based company not short of supporters on Wall Street after heavyweights JP Morgan and Goldman Sachs this week unveiled “buy” recommendations.

Deutsche Bank has also initiated coverage with a target price of $60 a share, noting that Arm is now a more royalty-centric, end market-focused, and system-solution-based entity than in its prior stint on the stock market.

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The bank believes these strategic shifts and the higher royalty rates they can command should accelerate the company's revenue growth, and further expand the valuation premium at which the company historically traded.

While some of these favourable dynamics are already in the valuation, it adds “there looked to be an attractive risk/reward in the name”.

For Birkenstock, a flotation price of $46 a share, which valued the German footwear company at $8.6 billion (£7 billion), proved too rich yesterday in what was Wall Street’s third-biggest listing of the year.

Shares fell by more than 12% on their first day, having been valued at the midpoint of the earlier indicative range. Birkenstock’s owners chose New York over Germany because of the attractive valuations and high trading volumes on offer, as well as due to the US being the company’s largest market in terms of sales.

Saxo Bank said Birkenstock was valued on a 2024 earnings multiple of around 18 times, which compared to adidas AG (XETRA:ADS) at around 15.3 times. However, it said Birkenstock had a higher growth profile due to low revenues in Asia and more potential for direct-to-consumer penetration.