Maplebear, parent of Instacart, and Arm have seen brutal reversals after sprinting out of the gates amid much-hyped IPOs. So is it worth buying the dip on Arm and Instacart stock?
It has been a tough period for initial public offerings, with volume drying up amid tighter financial conditions. It was hoped successful debuts for ARM and CART could act as a catalyst for an increase in the number of new issues.
Instacart Stock And Arm Make Strong Starts
On its first day of trading Tuesday, CART soared well clear of its IPO price of 30, which itself had come in right at the top of the expected range.
When the curtain opened on trading, Instacart surged as high as 42.95. It faded as it closed at 33.70, still a solid lift of more than 12%.
ARM stock did even better as it took its bow last Thursday. On its opening day, it closed with a gain of just under 25% as it reached 63.59.
It peaked the next day, its current all-time high of 69 representing a whopping gain of more than 35% on its IPO price. But then things started to go awry.
ARM And CART Reverse
Arm ultimately closed lower on Sept. 15, finishing the session down 4.5%. It has been falling ever since.
It hit a new low of 49.85 Thursday, which represents a dive of nearly 28% off its high. On Friday, it traded around 50 a share.
ARM stock was not helped when Bernstein analyst Sara Russo initiated coverage with an underperform rating and 46 price target Monday.
She said in a note to clients it is "too soon to declare" the firm will be an AI winner. She also pointed to worries over the mobile and consumer markets, where it has a strong presence.
There had already been a great deal of skepticism heading into Arm's debut. Research firm New Constructs said the Arm stock valuation is "based more on (majority owner) SoftBank's self-dealing in private markets to manipulate the valuation higher than the fundamentals of the company."
Instacart stock closed Wednesday down nearly 30% on Tuesday's high. After a bounce Thursday, the stock fell to around 30 Friday, near the week's lows.
As an aside, some investors may be confused with Instacart's official company name, Maplebear.
According to Barron's, Maplebear is a combination of "maple," a reference to Canada, and "bear," in honor of the California state flag. The San Francisco-based firm's India-born co-founder, Apoorva Mehta, moved to Canada as a teenager and ultimately to California, where Maplebear was formed.
IPO Stocks Carry Big Risks
A study by Nasdaq found that two-thirds of new issues underperform the market within three years of their IPO. It also found that IPO returns deviate significantly over the longer term.
It is easy for investors to get blinded to the risks due to the outperformance of a few noteworthy winners. Factors such as a limited supply of stock and the excitement of investors help propel the stock to dizzying heights. As reality sets in, share-price declines can be equally dramatic.
Legendary investors have long advised investors about the dangers of IPO stocks.
Investor's Business Daily founder William J. O'Neil flagged the risks in "How to Make Money in Stocks."
"Many IPOs are deliberately underpriced and therefore shoot up on the first day of trading, but more than a few can be overpriced," he said. "Because IPOs have no trading history you can't be sure whether they're overpriced.
Another titan in the world of investing was also well aware of the risks involved. Benjamin Graham, who is known as the father of value investing and who mentored Berkshire Hathaway CEO Warren Buffett, also advised people to steer clear of new issues.
"In every case, investors have burned themselves on IPOs, have stayed away for at least two years, but have always returned for another scalding," he wrote in the Intelligent Investor. "For as long as stock markets have existed, investors have gone through this manic-depressive cycle."
Still Interested In IPO Stocks? Consider This
Using stock charts can be a way to make a more informed decision on an IPO stock based on the true level of supply vs. demand.
Decades of IBD research has found a few big winners can form a powerful pattern much smaller in length than standard stock-chart bases. An IPO base can form in as little as seven days.
This pattern typically forms within 25 days of the stock's first day of trading. Just like with regular bases, the buy point is taken from the prior high of the base. The price gain on the breakout should be strong and in high volume.
Also look for a shallow correction within the base and for the pattern to form above its IPO price.
Are Arm And Instacart A Buy Now?
Based on that, it is still too early for investors to be taking risks on Arm and Instacart. Investors could consider adding them to their watchlists in case they form an IPO base.
Please follow Michael Larkin on X, formerly known as Twitter, at @IBD_MLarkin for more analysis of growth stocks.
