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IN THE NEWS

📈 The IPO Market Is Back in Action (Maybe!)

All of a sudden, the IPO market isn’t looking too bad.

Instacart plans to increase the target price for its initial public offering (IPO) after the successful IPO debut of Arm, a British computer chip design company valued at a steep premium. Shares in Arm soared about 25% on its first day of trading, a jolt to an otherwise sluggish IPO market in 2023.

• Instacart, the grocery-deliver company, intends to sell shares for about $28-$30 each, up from its earlier target of $26-$28, as it capitalizes on growing investor interest in IPOs. The adjustment could value the company at nearly $10 billion.

Instacart’s IPO is important because it signals a potential resurgence in the IPO market, which has been subdued due to higher interest rates and lackluster performances for many companies that went public earlier this year and in 2022. Just ask Bird, whose valuation has cratered from $2.5 billion to $11 million. Or ask WeWork, which has fallen from $40 billion to about $270 million, in another cautionary tale.

• Instacart has stood out in expanding from its core business, grocery delivery, to areas like advertising and technology services.
• Yes, Instacart could go for around $10 billion, but that’s a 75% cut from where it stood at the peak of investor optimism in 2021. Then, Instacart commanded a $39 billion valuation in a fundraising round, just before investor interest in startups took a hit.

For many, Instacart provides a breath of fresh air in the form of delivered groceries. No need to drive to the store, shop around, or wait in line. Just order with a few clicks on your phone from your favorite local grocery store. Founded in 2012, it had raised over $2 billion in venture capital funding.

Why it matters:

Instacart and advertising tech company Klaviyo are expected to go public next week in what could be continued boosts for the entire tech industry. They’ll look to ride off Arm’s momentum as the fourth quarter of 2023 approaches.

All eyes were on Arm’s performance this week, from investors to tech executives to bankers and founders. If the stock had a rough first couple of days, they could infer that the IPO market would likely stay sleepy. But this week’s share boost could bode well for other companies going public into year-end, perhaps ending the cold spell.

• Mighty Arm: Once Arm shares rose sharply Thursday to close around $64, investors got early evidence that we might be past the deepest, longest IPO drought since 2009.
• Analysts have estimated a backlog of about 200 companies that would’ve gone public by now had the market conditions been better.

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🫧 Goldman Sachs Says AI Stocks Aren’t in a Bubble

It’s no secret that an explosion in AI optimism has fueled the stock market’s rally this year despite the Fed hiking interest rates (which is supposed to be bad for stocks, at least in theory.)

The early AI winners in stocks have been firms most directly tied to the AI industry, like computer chip makers — such as Nvidia — and cloud service providers. These “near-term AI beneficiaries,” as Goldman Sachs puts it, have returned some 60% in 2023’s first eight months.

Past bubbles: While it’s easy to call the surge a bubble and compare the rally with Wall Street’s internet-tech euphoria in the late ‘90s, which collapsed in 2000, Goldman’s chief global equity strategist, Peter Oppenheimer, doesn’t think it’s so simple.

• Unlike then, when any company with “.com” in its name could raise millions of dollars, the companies driving this tech rally are much more financially robust.
• Firms like Nvidia boast strong balance sheets and returns on investments, suggests Oppenheimer, who says, “We believe we’re still in the relatively early stages of a new technology cycle that’s likely to lead to further outperformance.”

While Fed rate hikes are, as mentioned, supposed to weigh on stocks (hence the expression “don’t fight the Fed!”), the S&P 500 has continued higher.

The explanation? Investors expect much higher future growth rates for these businesses, with help from AI, more than offsetting Fed-related headwinds.

Why it matters:

Still, the rally is very concentrated — just 15 stocks accounted for over 90% of the S&P 500’s rally through the first half of this year.

• But in the ‘90s internet bubble, the biggest tech stocks had valuations twice as high as the seven biggest U.S. leaders in generative AI today (based on price-to-earnings ratios).
• And compared to the internet bubble, tech leaders now have much more cash. In fact, as a percentage of their market value, AI stocks have twice as much cash as internet bubble stocks.

Big picture: Tech stocks are ‘expensive,’ but Oppenheimer doesn’t think AI optimism has sparked the same market-wide euphoria as the internet did two decades ago.

• Although waves of tech innovation have historically created bubbles, once they inflate and deflate, Oppenheimer argues that “the technology tends to re-emerge as a principal driver in the stock market.”
• In other words, when the hype fades, new tech boosts productivity and creates new industries and opportunities, powering stock market indexes forward again.

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🪧 U.S. Auto Workers Hold First Simultaneous Strike

Some are spending their September sipping pumpkin-spiced lattes and eating apple cider doughnuts. Others are joining the picket line — The United Auto Workers (UAW) union initiated coordinated walkouts at three manufacturing plants owned by General Motors, Ford, and Stellantis (the parent company of Chrysler.)

The strike marks the most extensive labor movement in the U.S. industrial sector in years.

Halting production: The labor stoppages at the three Detroit-based automakers will cease production of key models, including the Ford Bronco, Jeep Wrangler, and Chevy Colorado pickup truck.

• “For the first time in our history, we’ll strike all three of the Big Three,” said the UAW president, but the strikes aren’t company-wide — yet.
• All strategies reportedly remain on the table if new agreements can’t be reached.

Focused strikes allow the union to minimize how much it compensates workers for strikes. While the UAW has an $825 million strike fund, it’s small compared to the billions in cash reserves automakers have accumulated to sweat them out potentially.

Strike demands: The walkouts come after weeks of disagreements between union leaders and car company execs. The union wants a bigger share of the money from selling traditional trucks and job security as the companies focus more on electric vehicles.

• The union is asking for a 40% pay increase, while the companies are only willing to offer up to 20% and don’t include benefits the union requests.
• None of the Detroit Three has proposed eliminating the eight-year tiered wage system, which requires new hires to work eight years to match experienced workers’ salaries, a key issue for the UAW.

Why it matters:

The strikes will involve 12,700 workers at Ford’s plant in Wayne, Michigan, GM’s plant in Wentzville, Missouri, and Stellantis’ Jeep plant in Toledo, Ohio. These plants make some of the companies’ most profitable vehicles.

• Based on Cox Automotive data, Stellantis has a 90-day Jeep inventory and extra shifts for SUVs and trucks. But a week-long Toledo plant shutdown could cost over $380 million in lost revenue.

Automakers fear cost hikes: Gerald Johnson, GM’s senior executive for manufacturing, said the UAW’s demands for wages and benefits would amount to a $100 billion cost for the company.

• Johnson noted this figure would be “more than twice the value of all of General Motors and impossible to absorb.”

Political pressure: The deadlock has turned political, leading President Joe Biden, seeking re-election next year, to call for a settlement.

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See you next time!

That’s it for today on We Study Markets!

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