Buying Into ARM's IPO? Read This Before Taking The Plunge

The process of a private firm initially entering the public market and offering shares in the company is known as an "Initial Public Offering" (IPO). Sometimes it is a tiny business that can grow from nothing to provide ownership to a larger market while also raising money is the epitome of success. These are typically fascinating new businesses to search for and evaluate. 

SoftBank Group is responsible for bringing ARM to the public. The company has made significant investments in new enterprises and faces several financial challenges SoftBank is a multinational Japanese corporation that controls ARM. The company is going public to raise capital and provide investors with the opportunity to own a portion of the business. SoftBank acquired ARM for $32 billion in 2016. The company has attempted to sell ARM for several years, but antitrust concerns have complicated the transaction. In 2020, Nvidia Corp agreed to acquire ARM for $40 billion, but the transaction was blocked by U.S. and European Union regulators.

The ARM IPO is a rare opportunity to invest in a leading chip designer. ARM is one of the few chip designers that is publicly traded. The IPO could give investors an opportunity to gain exposure to the growing chip market. With ARM there is a lot of noise surrounding the event, which is exciting investors. It is a significant event for the technology sector and the first time in several years that a prominent chip designer has gone public. Here are some important highlights from the prospectus. 

• ARM is a leading chip designer, and creates processors powering various devices, from smartphones and tablets to over 250 billion chips across various applications, including sensors and servers. In FY2023 alone, they reported shipping 30.6+ billion ARM-based chips.
• ARM licenses its cutting-edge products to semiconductor firms, OEMs, and diverse organizations to facilitate chip design.
• ARM's CPU technology has been an industry leader for many years. According to their prospectus, they had a market share of ~48.9% by value in the calendar year ending December 31, 2022, which was around 39.7% in December 2014.
• The company also has a growing presence in the data center and automotive markets.
• ARM, a high-growth enterprise, reported $2,679 million in revenue for FY2023, with a remarkable revenue CAGR of over 15% from FY2021 to FY2023.
• ARM's outlook remains promising, with a total addressable market (TAM) reaching ~$202.5 billion in December 2022 and anticipated growth at a 6.8% CAGR to ~$246.6 billion by December 31, 2025. This expansion is driven by the increasing demand for high-performance processing, particularly considering 5G adoption, mobile gaming growth, and the emergence of AI and ML workloads.
• Over 260 companies reported shipping ARM-based chips in the fiscal year ending March 31, 2023, including global tech giants like Amazon and Alphabet, leading semiconductor vendors such as AMD, Intel, NVIDIA, Qualcomm, and Samsung, as well as prominent players in the automotive, IoT, and other industries.

What’s not to like? 

Sometimes, as a result, those same excited investors above are compelled to buy stock in a firm they know little about and haven't really done their due diligence on.  Dragged in by good marketing. This can occasionally prove to be a grave error. UBER went public on May 10, 2019, with its IPO price set at $45 per share to huge hype. I think Flying cars were even mentioned. However, the stock price closed its first day of trading at $41.57, a decline of 7.6%. It took UBER more than two years to regain its IPO price. On January 27, 2022, the stock price closed at $45.01. 

The percentage of companies that are profitable after an IPO has been declining in recent years. In 2021, only 28% of companies were profitable after their IPO in the United States. This is down from a peak of 81% in 2009.

Today, an IPO has sadly been reduced to a sale of a company at the highest possible price to raise the highest amount of money possible for the owner. Does that sound like a great investment to you? So, from that standpoint, they are manufactured investments with all the current news flow priced in that start with an uphill battle for the buyer to make a return.

• The marketing is geared to sell you the investment.
• Valuations are aimed towards the higher end.
• They only have one price to buy and no averaging, restricting value.
• Expiring lockout periods can cause the stock to fall.
• The investment is designed to benefit the seller.

So, through the years, they have become less profitable for a couple reasons. Firstly, the market achieves efficiency more quickly on a newly listed IPO than investors can be. Secondly, the IPO’s promoters tend to be more than liberal with the truth behind the offering to sell questionable valuations with slick marketing to an unsuspecting public. It’s time to move on from the IPO space if you are looking for newly listed growth companies without fluffy packaging. Spinoffs are the alternative and a better hunting ground for new companies in my opinion. 

I am a fan of Efficient Market Hypothesis (EMH). The theory states that share prices reflect all information currently available. The EMH hypothesizes that stocks trade at their fair market value on exchanges and all information available in the share price is factored in. Not really a difficult theory to buy into, considering technology these days. IPOs are designed to offer you an early entry into a new company (usually with huge, supposed growth prospects). What started as a good idea has turned into a money-making machine not for the investor, but for the founders and the investment banks that orchestrate the offering. Ask yourself, what is not priced in with ARM that the market doesn’t know about? A serious question you need to ask yourself before putting in your hard-earned cash. 

If you are still thinking about investing, here is your checklist: 

• Hype and Overvaluation: Initial Public Offerings (IPOs), particularly those of well-known companies, can attract a lot of media attention and hype. This increased interest may cause the offered price to increase, which could result in overvaluation. Investors that invest early risk incurring a premium.
• Lack of Historical Data: Newly listed companies don't have a long history of financial disclosures to the public. It may be difficult to assess the company's performance and forecast its future course due to this lack of data.
• First-day Volatility: Prices frequently see strong swings on the first trading day for stocks, which is a normal occurrence. For investors who desire consistency, such volatility can be unnerving.
• Expiration of the Lock-up Period: Following an IPO, early investors and insiders are frequently subject to a lock-up period during which they are normally unable to sell their shares. If many shares are sold in a short period of time after this one, the stock price may decline.
• Underperformance: According to historical data, IPOs typically underperform the general market in the months and years after the offering. The chances of achieving significant long-term advantages can be skewed against, although there are undoubtedly exceptions.
• Interests of investment banks and insiders: These parties may have interests that diverge from those of the typical investor. Investment banks underwrite IPOs. Rather than creating long-term value for new shareholders, their objective might be to secure a successful offering.
• Pressure on Management: After a firm becomes public, the management team is under more pressure to reach quarterly targets. Sometimes, long-term growth efforts are hampered by this short-term focus.
• Unproven Management: In some instances, the management group of a firm going public may not have prior experience managing a publicly traded company, which has its own unique set of difficulties and legal requirements.
• Economic and market conditions: A freshly public company's performance may be impacted by general economic issues and market conditions. The stock may decline if a firm goes public during a bull market, but the economy deteriorates soon after.
• Shares may be diluted because of future equity funding rounds or the exercise of stock options, which will affect early investors.

On the date of publication, Jim Osman did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.