Arm, Reddit and Astera performance show strength of AI IPOs

Driving shares of top performers since the beginning of 2022 even higher.

Artificial intelligence is still the biggest winner in the recent slate of initial public offerings, driving shares of top performers since the beginning of 2022 even higher.

Reddit, which licenses its data to train AI models, has surged more than 55% since a late-October earnings release that bested Wall Street’s expectations. The post-earnings jump has pushed the social media company’s rally from its March public offering to more than 270%.

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Reddit sits alongside other AI champs such as Arm Holdings Plc and Astera Labs Shares of Arm, a chip designer, were up as much as 6.9% Thursday as investors digested its earnings report from the prior day. Although it gave a disappointing sales forecast, Arm’s shares have nearly doubled so far this year on enthusiasm about potential growth in its AI-related business.

“We view Arm as increasingly well positioned to both drive and benefit from the development of AI and expect long-term consensus revenue forecasts to keep rising towards our higher end estimates,” Citigroup analysts led by Andrew Gardiner wrote in a note on Thursday. “Arm deservedly trades on a premium valuation.”

Similarly, shares of Astera Labs are up 38% since it announced results on Monday. The company, which provides connectivity platforms for both cloud and AI, offered a rosy outlook for its 2025 pipeline, signalling sustained AI demand.

The gains signal continued investor demand for companies linked to AI, even as concerns have grown about big technology companies like Microsoft Corp. and Meta Platforms Inc. spending billions on AI initiatives that are not immediately bearing fruit. The sustained AI frenzy has driven the broader market higher and pushed the biggest winners to fresh records.

Reddit, Arm and Astera are the top performers among companies that have debuted since the start of 2022, raising more than $400 million. Astera went public in March, while Arm launched its IPO in September 2023.

Continued momentum in their shares shows that investors are willing to pay a premium for AI plays, and are especially willing to reward companies that can outperform Wall Street’s high expectations for growth. Arm and Reddit both trade at roughly 80 times forward earnings, while shares of Astera are trading at about 98 times. The Nasdaq 100 index trades at roughly 27 times forward earnings.

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The trend is set to continue, with more AI-related companies considering going public in the coming months. Among them are Cerebras, which builds systems for AI applications, and CoreWeave, an AI cloud service provider.

Of course, there is some scepticism on Wall Street over just how much longer the eye-popping rallies in AI names can continue.

For example, a majority of analysts who track Arm rate its stock a buy, but their average price target of $143.79 is well below where shares currently trade. Reddit is also mostly buy-rated, but the average price target suggests a drop of about 16%. Analysts are most bullish on Astera, with more than 80% of them rating the stock a buy, and price targets falling roughly in-line with where shares currently trade.

Those three stocks are outstripping larger and more established peers. Although Arm is trailing Nvidia Corp.’s gains, it is trouncing rallies in other semiconductor stocks including Broadcom Inc, Marvell Technology Inc and Micron Technology Inc Reddit’s soar puts it well ahead of Meta, up more than 65% so far this year, and the company recently eclipsed social media competitor Snap Inc in market value.

© 2024 Bloomberg

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