Arm, Instacart and Klaviyo's earnings offer another reason for IPO buyers' remorse

By Ciara Linnane

After their IPOs fizzled in the aftermarket, the companies first earnings reports also missed the target

First their initial public offerings fizzled in the days following their debuts. Now their earnings have disappointed.

This week's crop of earnings from three companies that recently went public -- chip designer Arm Holdings PLC (ARM), grocery-delivery app Instacart (CART) and digital ad company Klaviyo Inc. (KVYO) -- fell short in one way or another to put fresh pressure on prices that are below or barely above their IPO pricing levels.

The moves are unlikely to ease the concerns of investors who have been skittish about the IPO market of late.

"It's no surprise that Arm, Instacart and Klaviyo are posting disappointing earnings results," said David Trainer, chief executive of independent equity-research company New Constructs. The company uses machine learning and natural-language processing to parse corporate filings and model economic earnings, although its research has encountered pushback.

"These companies went public at nosebleed valuations," said Trainer. "Investors should avoid investing in stocks with such high valuations. Just because a company goes public, doesn't mean it's a good investment. Remember Wall Street tried to IPO WeWork at a $47 billion valuation, and its equity is worth $0 today."

See now: WeWork files for bankruptcy, capping a stunning downfall

The biggest deal of the three was that of Arm, which was widely anticipated and touted as a test of appetite for big tech deals, coming after a glut of such offerings.

The stock enjoyed strong gains on its first day of trade, only to see those gains peter out over the next few sessions. The chipmaker raised $4.87 billion by pricing its deal at $51, or the top of its range, at a valuation of $52.5 billion. The stock was last quoted at $51.12, down 6% on the day and was down 0.1% early Friday.

Arm reported earnings Wednesday that showed a fiscal second-quarter loss of $110 million, or 11 cents a share, whereas it earned $114 million, or 11 cents a share, in the year-before quarter. On an adjusted basis, Arm recorded 36 cents in earnings per share, compared with the 26-cent FactSet consensus.

Total revenue rose to $803 million from $630 million, while analysts had been expecting $740 million.

But its guidance for the third quarter of $720 million to $800 million in revenue, along with 21 cents to 28 cents in adjusted EPS, disappointed investors by coming up short at the midpoint. The FactSet consensus was for $776 million on the top line and 27 cents in adjusted EPS.

Bearish on Maplebear

Instacart, which trades as Maplebear, also disappointed with its first earnings since its IPO on Wednesday.

The company reported a nearly $2 billion loss, though its sales beat expectations and the company forecast "mid-single-digit" growth in the total value of transactions on its platform.

Instacart reported a net loss of $1.99 billion, or $20.86 a share, in the third quarter, driven by what the company said was "significantly elevated" stock-based compensation during its IPO. Revenue rose 14% to $764 million.

Analysts polled by FactSet expected a GAAP per-share loss of $15.07 cents, on sales of $737 million.

Instacart went public in September at $30 a share for a valuation of $10 billion and enjoyed a 40% gain in its first hours of trading before pulling back to close up 12%. The stock was last quoted at $24.78, down 9% on the day and has been trading below its issue price since Sept. 25, just five days after it went public.

Read now: Instacart IPO: 5 things to know about the app that's looking to ride a 'massive digital transformation' in grocery shopping

Klaviyo went public in September at $30 or a valuation of about $9 billion, and also saw a strong 22.5% pop in the first hours of trading before closing up just 9%.

That company posted earnings earlier this week that showed its losses widening and sales guidance that left no room for outperformance.

The stock was last quoted down 5% at 26.13.

The most recent deal to disappoint was that of German sandal and clog-maker Birkenstock Holdings Plc (BIRK), which has not yet reached its IPO issue price of $46. The stock closed Thursday at $39.90, down 5.5% on the day.

Birkenstock's IPO marked one of the worst debuts for a billion-dollar deal of the last decade, according to Renaissance Capital, a provider of IPO exchange-traded funds and institutional research. The stock ended its first day of trade down 12.9% and was down 21% by the end of that week.

Of the 95 IPOs that have raised at least $1 billion in the past 10 years, only five have performed worse than Birkenstock on their first day of trade. The deal was the worst since AppLovin (APP) in April of 2021, which ended its first day of trade down 18.5%.

"Larger IPOs are generally at a lower risk of immediately breaking issue: only 20% of the past decade's billion-dollar IPOs closed negative on the first day, compared to 27% for all IPOs," Smith wrote in recent commentary.

For more, read: Birkenstock's stock falls nearly 13% in trading debut, ends well below IPO price

Analysts initiated coverage on Birkenstock this week with mostly buy ratings.

But Trainer from New Constructs was critical of the valuation even before the deal came to market. The analyst pointed out in early October that the terms it set would mean the company would have a bigger market cap than peers such as Skechers (SKX), Crocs (CROX) and Steve Madden (SHOO).

That would leave Nike (NKE) and Uggs maker Deckers Outdoor (DECK) as the only footwear companies with a bigger market cap. To justify that, Birkenstock would need to generate more than $3.8 billion in annual revenue, or more than three times the $1.24 billion chalked up for all of 2022.

"We don't see this happening anytime soon, if ever," the analyst said.

For more, see: Birkenstock's valuation is too high and investors may not make money in its IPO, analyst says

The Renaissance IPO ETF IPO has gained 26% in the year to date, while the S&P 500 SPX has gained 14%.

-Ciara Linnane

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11-11-23 0919ET

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