As the initial public offering (IPO) market shows signs of life after a two-year freeze, Instacart and Softbank-backed Arm are leading the charge. Instacart’s stock skyrocketed 40% above its IPO price on its first trading day, reminiscent of the brand’s $39 billion valuation during the pandemic. Meanwhile, Arm’s debut also made a splash, with its stock surging nearly 30% post-IPO. These successful initial public offerings are drawing attention to the broader IPO market, which has been stagnant due to aggressive rate hikes by the Federal Reserve intended to combat inflation.

These promising IPOs from Instacart and Arm are more than just successful launches; they could potentially initiate a thaw in the frozen IPO market. Industry experts are closely monitoring these newly-public companies, as their performance could dictate the market’s appetite for future IPOs. With an unprecedented IPO backlog of over 200 companies, the highest in over two decades, the performance of Instacart and Arm could set the tone for a multitude of companies waiting in the wings. However, with the current economic landscape, companies are shifting their focus from growth to profitability, indicating a potential shift in market dynamics.

Instacart’s Soaring Debut and What it Means for the IPO Market

Instacart’s stocks experienced a 40% surge over its initial public offering (IPO) price on its first trading day, a significant leap from its pre-IPO valuation at $10.2 billion. This rise, along with Arm’s successful debut, may offer a glimmer of hope for the IPO market that has been dormant for two years.

A Trip down Memory Lane

The recent triumphant IPOs of Instacart and Arm, which saw a nearly 30% increase, harken back to the pandemic era where startups’ valuations skyrocketed and investors were eager to invest in unprofitable companies with promising growth. However, aggressive rate hikes by the Federal Reserve to combat inflation led to a freeze in the IPO market, similar to the aftermath of the dot-com bust.

The Thawing Begins

But Instacart and Arm’s successes may indicate a thaw in the IPO market. According to Christian Munafo, the chief investment officer of Private Shares Fund, the performance of these newly-public companies will be closely observed by venture capital firms, stock market investors, and private companies considering an IPO. The current focus is on trading above IPO prices, as it would indicate the market’s appetite.

The Real Test: Instacart

While Arm’s IPO was successful, it isn’t a standard case due to its history on the London Stock Exchange and decades of operation. Instacart, on the other hand, is a better indicator of market sentiment. Craig Coben, former global head of equity capital markets at Bank of America, emphasized the importance for companies to demonstrate a track record of profitability before testing investors in the current stage of the market.

Momentum Builds, But No Guarantee for a Tidal Wave of IPOs

However, even if companies like Arm, Instacart, and the upcoming Klaviyo’s IPO perform well, it doesn’t necessarily mean a return to the IPO frenzy experienced during the pandemic. Rachel Gerring, EY Americas IPO Leader, noted that these companies are profitable, well-scaled, and have name recognition, making them ideal for investors in a more risk-averse environment.

However, the macroeconomic environment, including high borrowing costs and potential rate increases, could have a larger impact on the market than individual companies. The uncertainty surrounding the extent and duration of the Fed’s actions could influence companies’ ability to forecast.

Takeaways

The successful debuts of Instacart and Arm, along with the upcoming Klaviyo IPO, are indeed encouraging signs for the IPO market. However, it’s essential to keep in mind that these are still early days. The broader economic environment and regulatory factors will undoubtedly play crucial roles in shaping the future of the IPO market.