Three IPOs test the market

0:05Pushkin. It's alive. We've finally got some companies listing on stock markets. Big, shiny companies at that. It all suggests that the death of the initial public offering has been greatly exaggerated. We've got some lovely IPOs coming through. We've got chip designer Arm. We've got a grocery delivery company type thing that I'm not terribly familiar with, Instacart. And we've got fashion-resistant sandal maker Birkenstock, all lining up to launch on stock markets now or now-ish. So what does it all mean? We're going to figure it out for you. This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin.

0:43From sunny London, I'm markets editor Katie Martin, standing in for Ethan Wu, a poor substitute, but I'm going to do my best. And I'm joined down the line from New York by Robert Armstrong, who writes the Unhedged newsletter, and who just cannot wait to buy shares in his very favourite German shoe manufacturer. Isn't that right, Rob? Katie, you're wearing Birkenstocks right now, aren't you? That's a very personal observation, and no, I'm not. But I do wear them pretty much all summer. I know that our opinions differ greatly on these fantastic sandals and you hate them and you're wrong. But listen, let's crack on with the markets thing.

1:15Arm first. Let's talk about arm. Well, let's talk about arm. Why is it such a big deal that this thing is hitting the market? Why is everyone so animated about it? Well, the market has been a bit dead for IPOs. I don't need to tell you, Katie, what a weird couple of years we've had in financial markets. Pretty weird. And we still, despite high stock prices, people still feel a little trepidation. There has not been a lot of IPOs recently. And this is a big one. This is a$50 billion company coming to market,$50 plus billion company coming to market. They're selling something like$9 billion in shares.

1:53Do I have that right, Katie? I think so. Yeah. And it is also being sold by SoftBank and the notorious Masa Son, CEO of the Japanese conglomerate, who is associated with ups and downs in the world of technology. Arm is a brilliant sort of business. It is a chip designer. And what is brilliant about Arm's particular business is all they do is design these things. So all Arm really is, is a bunch of nerds with degrees in electrical engineering, sitting around in a room, thinking up smart ways to build chips. And the building is done by somebody else. So this is what we finance nerds call an extremely capital light business.

2:40It's all basically intellectual property and no stuff. It is also well placed in the world of electronics in that what they specialize in is low power chips. That is chips that can process a lot of information without using a lot of energy and generating a lot of heat. What this means is that they are very good things to have in smartphones and other mobile devices. Now, this is like a huge British success story. Yes. It got taken private by SoftBank and its founder, Masayoshi Son. I think it is. If I'm not wrong, Katie, it's the only British success story since the Battle of Waterloo. Am I getting that right?

3:24Knock it off. Look, the point is no fewer than three UK prime ministers tried to convince SoftBank to list this thing in London and it didn't work. So I guess that kind of all relates back to why this is a big deal, right? is because it's a massive tech IPO, biggest IPO anywhere for the best part of two years, I think it is. This is going to be a big test of investor demand. And there is no better test of investor demand than in the States where there's a huge ecosystem of tech investors. And yeah, we're going to figure out really whether markets have had their fill of tech stocks or whether they've still got the appetite and whether this thing has been priced right.

4:00And we are at a kind of crucial moment right as we speak, Katie, because right now it's Thursday morning in New York and Armstock has not yet begun to trade. The offering has been priced at$51, meaning the company, SoftBank, has pushed out the shares at a certain price to the dealers in the marketplace. But today, the dealers are going to push those shares out into public markets where they will start trading. No pressure, guys. And so it's a kind of moment of truth. And notoriously, IPOs can move quite a lot on that first day of trading. So that's going to be exciting to watch. Yeah. Now, we've talked about the good stuff.

4:43We should also talk about the sort of bad stuff about ARM, which is that it is slightly yesterday's news. So if this was eight years ago, say mobile was everything. Mobile, mobile, mobile was all anybody talked about in computing. And the space everybody is trying to get into now, of course, is artificial intelligence, which is dominated by a different chip company, namely NVIDIA. So while ARM is still a good business, it is not the business du jour, and it doesn't seem to be growing quite like it used to. So excellent business, important business to the world tech ecosystem, maybe not at the total peak of its powers and appeal for investors.

5:30Yeah, yeah. Now, SoftBank is a very sort of strange, gnomic organization. What's its record like in terms of getting these IPOs out to market? Katie, as our colleague Bryce Elder pointed out in a recent article in FT Alphaville, which our readers should have a look at, Masa Son, the CEO of SoftBank, has a very mixed record listing companies that he has bought. He tends to list companies when he is badly in need of money to do something else. Bryce's article was called, If Masa is selling, why are you buying? And I think that is a question investors might want to ask themselves. But this has kind of got to go well to set the tone for the rest of the market.

6:19Sure does. So speaking of the rest of the market, Instacart. Tell me about Instacart. This one's coming too, right? It is coming too. And it's a funny kind of business. It's a little bit like Okada, which is a business you might be familiar with in the UK, but it's much bigger. And it's very simple. Most of the time when Americans order groceries online, they are very often either doing it through Instacart's site or they're doing it from a grocery store site that is operated by Instacart. So tell me, does Instacart say it's a groceries company or does Instacart say it's a tech company or does it depend which bit of the market investors are most hot on?

6:59I will give you one guess. Does this company advertise itself as a delivery company or a tech company? I'm going to say tech because it's cooler. Yes. Your work has made you cynical. So here's the pitch. So what does Instacart do? It sends a person with a little grocery cart to literally pick your groceries off the shelf of the grocery store, puts those groceries in a car, drives them to your house, you buy them. It takes a cut of that transaction. And the question is, is all the technology that is involved in that, the front end website, the following of the market trends, the putting of different items in front of consumers, et cetera, does that make this a tech company?

7:46Or is this just another company that moves heavy things around? And you may remember this question as one everybody asked about Uber. About 10 years ago. Moves heavy things around like passengers. Yeah. Like passengers. So Instacart is to cans of tomatoes what Uber is to people. And it has taken Uber a long time to make a profit. Uber now does about 130 or so billion dollars of rides a year. And only now is it really printing proper profits. And it's not clear even how sustainable that is. So those same questions hang over the Instacart offering. I think Instacart's a great product. I use it. My family use it.

8:35I think it works well. The question is, am I getting all the value out of it? A very interesting thing about the business and a big hope for investors is that Instacart has a nascent advertising business. So when you go to your online grocery shopping website, somebody has to be at the top of the screen. when you type in canned tomatoes, which brand of canned tomatoes comes up first. And you will remember that there is a tiny company called Google that has made a lot of money having people pay it for appearing at the top of search results. And Amazon now also has a very large and extremely profitable advertising business.

9:20So I think the great promise for Instacart is it does all this dreadful low margin moving around of groceries. But if it gets big enough in that business and kind of break even over there, it could have a monstrously profitable advertising business on top. All they have to do is get you to buy tomatoes that you don't really want. It's tomatoes. I don't even know what a tomato is. It's very clearly tomatoes. So look, let's move on to another company, Birkenstock. Now, this should be a really straightforward IPO, right? They sell beautiful sandals that haven't changed in hundreds of years that I know you're extremely fond of.

9:59What I'm enjoying about how it's touting this IPO is that it says one of, it lists all these reasons why Birkenstock is great. That's what they do in their IPO filing. And they say that one of the things that's driving it along and is going to continue to drive it along for the next 250 years, no less, is the breakout of modern feminism. Yes, I'm here for this. I think we can all agree that the world is a better place if we can all wear comfortable shoes. Yeah. And I think if feminism makes that happen, that is great. Now, of course, my second question about Birkenstock is, does a comfortable shoe really have to look this awful?

10:42And but people like them. I mean, the growth of this company is impressive. The margins are impressive. This business is working. Let me tell you something. I buy these things a lot. I buy them until they wear out and then I buy more of them and I end up with lots and lots of them in my house. But they've really jacked up their prices. I'm not surprised they're making decent margin here. Right. And the one point against the IPO, which our colleagues over at the Lex column made very well is that revenue is growing faster than unit sales. So they've got revenue growth, but part of it is because they're really sticking it to Katie Martin.

11:24God damn it. And so how long can that go on? There is another cautionary tale, which I can sum up in one word to you, Katie. And that word is Crocs. It is a listed company. It has done very well, but the winds of fashion have just slightly turned against the crock. And even though that company is growing well, it now trades very cheap on the stock exchange. So you might pay up in the Birkenstock IPO because right now is a Birkenstock moment. And then you wake up in a year or two and Katie Martin is the last person in Europe buying Birkenstocks because something else, something more attractive but equally comfortable has come along.

12:15I'm a loyal, a loyal customer. Other sandals are available. So look, in a weird sort of way, arms got to go well for Birkenstock to go well, right? You know, this really is a kind of a big moment for testing the waters in the markets. The thing about IPOs is that they are incredibly sensitive to sentiment. Yeah. You know, over time, stocks kind of trade and under normal circumstances, they will find their level. But even with established companies like these companies, IPOs, the market hasn't kind of figured itself out yet. so there is some fluctuations that don't necessarily have to do with fundamentals and if one big one goes badly maybe the second one which might be just as good or a better story might not go as well yeah it gets kiboshed yeah so Robbie you're rarely wrong about things you have a very acute sense of fashion and styling but you're wrong about Berkey's just accept it on that note we'll be back in a sec with Long Shorts

13:26okay now it's time for long short where you go long something you love short something you hate rob where are you on this i have what is known as a contrarian call katie i am long elon musk's reputation okay elon has been much in the news this week because walter isaacson's biography is out and every American magazine and probably a lot of English ones too. The FT, et cetera, has been covering Isaacson and Musk and the book. And everybody seems to agree that for all his brilliance, Elon is an absolutely unbearable person. And I just think it can't get any worse for him reputation wise. This has to be the bottom.

14:14It is time to buy Elon's reputation. He will do by accident something nice in the months to come. Rob, if the past few months have taught you nothing else, it's that you think you've hit the bottom of the barrel and he finds a new barrel. He rips off the bottom of the one barrel and there's like an infinite number of barrels below that barrel. Another barrel underneath this one. I'm going to keep going. Okay, well, good luck with that. I am going to be short the euro. so i know historically that's been a pretty good trade it's not been bad so european central bank today raised interest rates by a quarter of percentage point even though it acknowledged that the economy is not looking super rosy and the euro weakened now normally you'd expect central bank raises rates currency climbs in this case it has not done that and that is the market's very special way of saying, yeah, we don't think this is a very good idea, or we think you're going to have to unwind this sooner rather than later.

15:16Classic central bank mistake. Policy error. I mean, there's an awful lot going on here and early reactions can be a little bit misleading, but you know, the dollar is kind of the only game in town in currency markets at the moment. It's like a real wrecking ball. And it is just conspicuous that the market is not looking at this rate rise from the ECB and saying, cool, finally, I can buy some euros. It's saying, hmm, I think this economy is in a little bit of trouble. So long Elon Musk's reputation, short euros, that's the trade of the week. We're going to be rich people, Katie. We're going to buy millions of Birkenstocks.

15:52We're going to have to get back to our screens and find out what, if anything, Armstead is doing yet. As we record this, it's Thursday morning in New York, and it's not on the screens. We don't know how this thing is performing. So hopefully we don't look completely wrong about all this by the time you, dear listener, are listening. If we are, blame Rob. Unhedged is produced by Jake Harper and edited by Brian Ershtat. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's Global Head of Audio. Special thanks to Laura Clark, Alistair Mackey, Jacob Weisberg, and Jess Trulia.

16:28FT premium subscribers can get the Unhedged newsletter for free. A 90-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.