Should you participate in Australia’s second-largest IPO in history?

When it comes to artificial intelligence (AI) and initial public offerings (IPOs), there’s never been any shortage of excitement.

Since ChatGPT entered the scene in late 2022, markets have been captivated by the promises of AI.

By now, many people have likely experimented with some form of AI and may be using it to improve efficiency in their personal or professional lives.

Investors in AI-linked companies have clearly benefited. Over the past five years, the tech-heavy Nasdaq has rallied nearly 100%. Nvidia has led the charge, surging by more than 1,000% over this period. 

The chipmaker shows no signs of slowing down. After setting a new all-time high this week, it currently sits on the cusp of becoming the world’s first US$6 trillion company

On the IPO side of things, Elon Musk’s Space Exploration Technologies Corp (SpaceX) debuted on the NASDAQ this year. This was the largest IPO in history, raising nearly US$86 billion. It also crowned Musk the world’s first-ever trillionaire, with his wealth surging even further ahead of his tech-industry rivals.

So, when Australia’s second-largest IPO in history promises to provide Aussie investors with exposure to AI, is the opportunity too good to be missed?

I am, of course, referring to Firmus Technologies, which is set to list on the ASX later this month.

What is Firmus?

Firmus Technologies was founded in 2019 by Oliver Curtis, Tim Rosenfield, and Jonathan Levee. The company originally started out as a Bitcoin mining operation before pivoting to AI infrastructure around 2021-2022.

Today, the company designs, builds, and operates highly energy-efficient, modular, and liquid-cooled data centres, referred to as ‘AI factories’. These factories are fitted with highly sought-after specialist equipment such as Nvidia’s graphics processing units (GPUs), which are rented to companies.

With Meta Platforms, Nvidia, and OpenAI as customers and Nvidia as a supplier, many of the biggest names in tech are part of the ecosystem.

Given the scale of demand for data centres driven by the global AI boom, it’s easy to see why this IPO has gathered so much attention.

As Regal Partners’ Phil King put it, “Firmus is incredibly lucky. It’s in the right spot at the right time for the biggest technology revolution we have seen and the biggest cap-ex boom in history.”

For ASX investors with little exposure to AI-themed companies in the local market, the offering adds a new level of opportunity and excitement.

When will the company begin trading?

According to The Australian Financial Review, Firmus is set to begin trading on the ASX on 23 October. 

Based on the originally reported offer price of $11, the company is looking to raise around $7 billion. Combined with existing ownership, this would give it an implied equity valuation of nearly $44 billion. For context, this would put it in the league of well-known Aussie blue chips Transurban Ltd (ASX: TCL), Woolworths Ltd (ASX: WOW), and Woodside Energy Group Ltd (ASX: WDS). Each of these companies currently has a market capitalisation of between $40 to $50 billion.

If priced at $11, the proposed deal would be Australia’s second-largest IPO by funds raised. Telstra Group Ltd (ASX: TLS)’s 1997 listing, which raised $14 billion, still holds the top spot. Medibank Private Ltd (ASX: MPL), which raised nearly $6 billion in 2014, would move to third place.

However, overnight, it was reported that the initial bid price may be reduced as low as $8.25, amid a lack of interest from prospective investors at the higher price. This would materially reduce its market capitalisation upon listing. 

It’s also worth noting that the prospectus is yet to be released. That’s due on 12 October.

Who are the existing investors?

Should you choose to buy shares in the company, you may be wondering who you’d be investing alongside. After all, high insider ownership is a common criterion many investors look for when making a new investment, as it often signals alignment of managerial and shareholder interests. 

In the case of Firmus, there is decent alignment with company founders and their close family owning around 24% of the company. Co-Founder and Co-CEO Oliver Curtis holds the largest stake at 13.3%, followed by his father, Nick Curtis, at 5.5%. 

It’s also worth noting that the three founders have the majority of their holdings subject to escrow restrictions. This means they can’t sell their shares when the stock begins trading, even if the stock skyrockets in value. 

Other notable investors include Nvidia (7.2%) and Blackstone (6.7%). 

Several institutional investors hold 53%, including Wilson Asset Management and Regal Partners, who were early backers. 

How can ASX retail investors participate?

Not all ASX retail investors can participate in IPOs. When a company is getting ready to list, shares are allocated to specific brokers and investment banks. In the case of Firmus, that being JPMorgan, Morgan Stanley, Bank of America, and Morgans. 

If you’re interested, you’ll need to check with your broker to see if you can access an allocation. 

Retail applications and offers are expected to run from 12-19 October. 

It’s also worth noting that Firmus’ broker syndicate has revealed that around half of the IPO book is likely to go to existing investors. 

Of course, should you miss out, there will be an opportunity to buy the stock after it lists.

The common IPO trajectory

Rather than focusing on whether you can participate, you should also question whether you should do so.

IPOs are exciting, and FOMO can be a powerful motivator. 

However, history has shown that shares often retract after initially listing. 

SpaceX was arguably the most highly anticipated IPO in history. After listing at a share price of $135 on 12 June, the company soared, powered by market enthusiasm. However, within just a few months, it retreated. In August, investors could have picked up shares for $104. While it is currently trading (marginally) back above its IPO price, patience paid off for those who waited for a more attractive entry point. 

Using a more local example, fast food retailer Guzman Y Gomez Ltd (ASX: GYG) listed on the ASX in June 2024. This was regarded as one of Australia’s most successful and high-profile public floats in recent years. GYG shares followed a similar ‘pop and drop’ trajectory to SpaceX, soaring 36% on its day of listing before retracting. Only recently has the company climbed back above its IPO price.

More broadly, the Australian Financial Review reported earlier this year that of the 17 companies that had listed this year, just six were trading above their IPO price.

Firmus specific risks

Of course, it’s not just ‘IPO risk’ that prospective investors need to consider. While Firmus appears to be a promising company backed by strong demand, there are risks to consider. 

Firstly, the company has very little operating history, making it difficult to determine what it’s actually worth. Critics have noted that the company has yet to make a profit and has billions in debt. The reported listing price ($11 per share) implies a valuation multiple of up to 1,000 times its current revenue.

Another risk worth noting is environmental concerns that have been flagged with regard to data centres. These have been widely reported in the media and could cause major setbacks. 

Goodman Group (ASX: GMG) recently abandoned plans to build a $1.2 billion data centre in Sydney over similar concerns. 

It was also recently reported that hedge fund Plato Asset Management is planning to short the stock as soon as it lists. 

Another skeptic, Ten Cap’s portfolio manager Jun Bei Liu, described the Firmus IPO as a “high risk proposition”. 

As reported by the Australian Financial Review, Bei Liu described Firmus as “probably the most polarising IPO [she has] ever seen”, claiming that “the lack of detail they disclose is unprecedented.”

So, not everyone is convinced.

How to decide

If you’re still on the fence about whether to invest in Firmus, remember that investing does not need to be an all-or-nothing decision. It’s up to you to decide how much you want to invest and when. You can always start out small and build your position as you learn more about the company, or decide to wait for a more attractive valuation before going all in. 

There are also other ways to invest other than buying the stock directly. Given the likely size of the company, it could be included in the S&P/ASX 200 Index (ASX: XJO) at the December rebalance. Hence, the stock will likely make its way into many exchange-traded funds (ETFs) in the near future, providing investors with diversified exposure.

The post Should you participate in Australia’s second-largest IPO in history? appeared first on The Motley Fool Australia.

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Bank of America is an advertising partner of Motley Fool Money. JPMorgan Chase is an advertising partner of Motley Fool Money. Motley Fool contributor Laura Stewart has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Blackstone, Goodman Group, JPMorgan Chase, Meta Platforms, Nvidia, and Transurban Group. The Motley Fool Australia has positions in and has recommended Goodman Group, Telstra Group, and Transurban Group. The Motley Fool Australia has recommended Meta Platforms and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.