Nvidia Sets the Stage for Arm IPO to Ride AI Wave

The timing for Arm Ltd.’s return to the public markets couldn’t get much better.

(Bloomberg) — The timing for Arm Ltd.’s return to the public markets couldn’t get much better.

Wall Street is swooning over Nvidia Corp.’s blockbuster quarterly results, investors are flocking to anything connected to artificial intelligence, and money managers are clamoring to put money to work after the IPO market had run dry for more than 18 months.

The key for the Softbank Group Corp.-backed company is convincing investors that its vision to be a player in AI can drive growth after sales stagnated with the semiconductor industry working through a glut of chips. 

The chip designer mentioned AI roughly 50 times in a filing that laid out its ambitions to be at the center of the transition to a world increasingly dependent on AI and machine learning. That came ahead of an initial public offering slated for sometime next month, with plans to meet investors in a roadshow after Labor Day. 

While Thursday’s Nvidia-fueled rally was short-lived, the company is up more than 220% this year having added more than $800 billion in market value. That’s partly due to Nvidia being the best positioned company to benefit from an AI transition, something Arm is looking to tap into given the California-based chipmaker is among its hundreds of customers.

“I’m sure Arm is cheering this morning that Nvidia had a great quarter, I’m sure that makes this a lot easier for them,” said Chris Smith, the portfolio manager of Artisan Partners’ Antero Peak Group, which oversees more than $3 billion. That said, “the actual exposure to AI is much much lower at Arm” and peers than it is for Nvidia, he said by phone.

The market for semiconductors has grown tremendously since 2016 when SoftBank purchased the company for $32 billion, Smith pointed out. The firm confirmed in its filing this week that it had bought back a 25% stake in Arm from its Vision Fund for $16.1 billion, valuing the company at more than $64 billion. 

That sets the stage for Arm to break a freeze across IPOs in the US as it talks up the outlook for AI, while looking to benefit from the year’s gains for many of its customers. Since the start of the year, the Philadelphia Stock Exchange Semiconductor Index has rallied 37%, more than double the gains for the broader S&P 500 market benchmark.

Read more: Arm Wants to Ride AI Wave, But China Is a Key Risk: Takeaways

Markets have cheered companies with exposure to AI since ChatGPT took the world by storm late last year. Smaller companies like Super Micro Computer Inc., C3.ai Inc., and Palantir Technologies Inc. have all more than doubled in market value this year.

Just $14.4 billion have been raised through IPOs on US exchanges this year, a drop from this time last year and a 94% plunge from 2021’s record year, according to data compiled by Bloomberg. That lines Arm up to help break a drought that’s kept companies on the sidelines as they wait for a more attractive environment.

“If there is a company that the IPO market will open for, Arm seems to be that kind of company,” Steve Sosnick, chief strategist at Interactive Brokers, said in a phone interview. “If we’re not at peak AI enthusiasm, we’re probably fairly near it, and that’s certainly a beneficial time if you’re trying to market an IPO that can plausibly say they’re attuned to AI.”

The dearth of IPOs this year hasn’t been aligned with broader poor market fundamentals that hit sentiment in 2022. Major stock benchmarks, despite a pullback this month, have rallied back to levels seen in April 2022, while the VIX fear gauge has held below 20 since late March — a key level for bankers seeking a less volatile equity market for pricing stock offerings.

–With assistance from Michael Hytha.

(Updates share movement throughout.)

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