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MarketWatch First Take: Arm deal is expected to lift tech IPOs, but not all future debuts will have the same draw

The strong debut of Arm Holdings Plc. is expected to reignite the long-dormant IPO market for tech companies, but not all the current deals in the pipeline will have the same draw for investors.

On Thursday, chip designer Arm ARM, +24.69% went public again, after seven years of ownership by SoftBank Group Corp. 9984, +2.08%. The U.K.-based company’s shares soared over 25% in their debut, giving the company a valuation of nearly $68 billion.

“As the biggest tech IPO since Uber (2019),  Arm’s strong first-day return is a ‘shot in the arm’ for the tech IPO market,” said Matthew Kennedy, an analyst at Renaissance Capital, which tracks IPOs and also has its own IPO ETFs IPO IPOS.

Next week will be another test, as grocery-delivery service Instacart CART, and Klaviyo KVYO, , an email marketing-automation company, are set to go public. Both companies have multibillion dollar valuations as private companies. Instacart, though, has significantly lowered its valuation to about $9 billion, after being valued as high as $39 billion during a 2021 funding round.

“While the tech market is reopening, for now most tech IPOs will need to offer a combination of growth, profitability and a compelling valuation,” Kennedy said in an email. Renaissance has been predicting for the past few months that the IPO market would gain some momentum leading into the fall. “I think we are seeing evidence of that,” he said.

Tech IPOs have been sidelined since 2022, he said, noting that Credo Technology CRDO, +1.92% was the one U.S. venture-backed tech company to go public that year, compared with 42 venture-backed IPOs in 2021. The last tech unicorn — a company with a more-than $1 billion valuation — to go public was Samsara Inc. IOT, -0.99% in December 2021.

Previously from Therese: SoftBank’s Arm is going public, but it faces a rapidly growing threat

Arm is a bit of an outlier in the IPO arena, given the fact that the company is not a young or unknown tech firm. Arm was founded in 1990 and its chip designs, known for energy-efficient power consumption, have been in mobile phones since the mid-1990s. The company reported $2.7 billion in revenue for fiscal 2023, flat with the previous year, but Arm believes it has a potential for upside in artificial intelligence and machine learning, since its processors can be designed to accelerate key parts of algorithms for future AI applications.

Read: 5 things to know about Arm ahead of its IPO.

Another potential IPO candidate that could come later this year is Reddit, the online discussion forum, but a strike by its content moderators gummed up the works earlier this summer. Reddit filed confidentially to go public in late 2021, but after the IPO market froze, its deal was put on hold.

Kennedy noted that the dry spell for venture capitalists may be coming to an end.

Still, investors will have to study each prospectus as it comes, weighing the differences between younger companies that may have more upside potential, but more risk, versus an established, but slower growing, company like Arm.

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