Blockbuster Listings in September. Spark New Life into IPO ETFs

After hike-induced hibernation, IPO awakening signs emerge but where to get maximum IPO exposure?

Since 2000, only two years have had fewer Initial Public Offerings (IPOs) than the present year, and they both followed the Great Recession of 2007. Year-to-date, 117 IPOs launched in the US market, far from the 2021 peak of 1035 IPOs. 

This coincides with the Federal funds rate, as the flatlined period between 2020 and 2022 created an environment of cheap money. And just as the Fed triggered the 40-year high inflation by sharply increasing M2 money supply, at around $5 trillion, the anti-inflation remedy suppressed the formation of new IPOs. 

Fed Interest Rates

Nonetheless, a resurgence is on the horizon on an individual IPO basis. Rivian Automotive (NASDAQ:RIVN) was the most valued IPO in 2021 at $13.7 billion. Arm Holdings (NASDAQ:ARM) outclassed it by nearly 4x this September, as the British chip designer received a $52.3 billion valuation. 

Other IPOs were boosted by AI hype as well.

AI Hype Comes to the IPO Rescue

Despite higher interest rates, OpenAI’s ChatGPT opened the capital floodgates to a new industry. Generative AI is hungry for chips if it were to be deployed on a mass scale. Nvidia (NASDAQ:NVDA) has benefited most from this new demand-supply dynamic, transforming itself from a video gaming company to a data center company. 

The AI hype spilled over to new listings as NVDA shares climbed to 192% YTD performance. Arm (ARM) is the world’s premier chip designer owned by the Japanese SoftBank (TYO:9984) investing group. Arm is critical in issuing microchip licensing from wearables and smart homes to smartphones.

ARM shares launched on September 14th, receiving Nasdaq listing at $51 before trading. At 52.3 billion valuation, it is the third-largest IPO listing in Nasdaq’s history, benefiting from AI and rising 5G and Internet-of-Things (IoT) demand. 

September’s IPO Roundup

Following Arm, Instacart (Maplebear Inc.) (NASDAQ:CART) was next on September 19th, receiving a fully diluted valuation of $9.9 billion. Although far from the expected $39 billion figure in 2021, the former Maplebear is still in the top IPO range. 

At the core of Instacart’s business model is linking customers with grocery retail to facilitate same-day delivery. Both retail theft and post-lockdown habits have spiked Instacart demand. Moreover, Instacart had already integrated OpenAI’s ChatGPT to offer personalized and anticipatory recommendations in the form of “Ask Instacart” tool. CART stock was priced at $30 per share on the IPO launch but dipped to $28.82 on Wednesday. 

Another successful IPO that aligns with the times is Klaviyo Inc (NYSE:KVYO). The marketing automation company launched just after CART on September 20th at a $9.2 billion valuation, with shares equally priced at $30. Klaviyo integrates a suite of AI tools so companies have optimal responses to content, timing, and marketing distribution channels. This translates to automated A/B/n testing and curtailing marketing costs by employing predictive data science generated from Big Data demographics. Unlike CART, KYVO shares have increased since the IPO launch, trading at $34.53 per share.

In addition to AI-boosted stocks, biotech is also surging. Neumora Therapeutics Inc (NASDAQ:NMRA), also backed by Japanese SoftBank, received a market cap of $2.51 billion on the September 15th launch. The Nasdaq-listed shares were priced at $16.50.

Lastly, under the $1 billion IPO valuation threshold, San Diego-based biotech firm RayzeBio Inc (NASDAQ:RYZB) made it to a $995.7 million valuation. RayzeBio shares launched at $18, topping at $26 since.

More IPOs Incoming?

Presently, there is a 40% chance of another Fed hike by the end of the year. However, if the market takes the Fed’s message of “higher for longer seriously,” this expectation may result in a different outcome. 

The question is when to expect a reprieve in the form of rate cuts? According to Apollo research, the distance from the last to the first hike is, on average, eight months. This means that the earliest rate cut could come in March 2024 or in July if there is another hike this year.  

Fed Hike Frequency

Depending on this dynamic, many large IPOs are in the waiting line. The hottest upcoming IPOs are Reddit, Stripe, and Chime Financial. The latter two are geared towards a younger demographic, thanks to their user-friendly interfaces and business integrations for online payments. 

Going the route of Robinhood (NASDAQ:HOOD), Chime Financial is offering fee-free banking, its valuation nearing $25 billion last year. PayPal (NASDAQ:PYPL) competitor Stripe is projected to be the most anticipated IPO in the FinTech arena, having reached a speculative $50 billion valuation figure this March.

Following a brief and ineffectual moderator blackout, Reddit is heading for the $10 billion IPO range.

ETFs: Streamlined IPO Exposure

Just as exchange-traded funds (ETFs) collect a basket of hand-picked stocks, they provide the same exposure for freshly listed ones. Investors should look out for two IPO ETFs: Renaissance IPO Index (IPO): lists 70 stocks, of which nearly half (48.3%) are from the tech sector.  62% of stocks have over $10 billion market caps. IPO’s YTD performance is 32.20%. First Trust US Equity Opportunities ETF (FPX): lists 102 stocks, more evenly divided between IT (26.88%), industrial (24.85%) and consumer discretionary (17.11%). As less focused on tech growth, FPX’s YTD performance is a modest 12.78%.