Shares in Arm Holdings, listed as ARM.O, surged by nearly 25% above their Nasdaq debut price on Thursday, reigniting investor optimism for a revival in the lacklustre initial public offering (IPO) market. The stock, commencing at an opening price of $56.10, recorded an impressive gain of 24.68% to conclude the day at $63.59. This development propelled the British chip designer to a valuation of $65 billion as it returned to the public markets after a hiatus of seven years. It’s worth noting that the IPO had been initially priced at $51.
Arm’s robust performance signifies a potential resurgence in investor interest in IPOs. The IPO market has faced significant challenges in recent years due to geopolitical tensions and rising interest rates, but this success story suggests a more positive outlook.
Salman Malik, a partner at Anson Funds in Toronto, commented, “It is a successful IPO. It will have a positive impact on the IPO pipeline and shows the AI theme is alive and kicking.”
SoftBank’s Arm IPO Success and CEO’s Long-Term Vision for the Company
Several companies are gearing up to make their debut on the stock market in the coming weeks. Among them are Instacart, a popular grocery delivery service, Birkenstock, a renowned German footwear manufacturer, and Klaviyo, a marketing automation platform. If these initial public offerings (IPOs) prove successful, experts predict that they may pave the way for a flurry of new companies to go public in 2024.
One notable recent IPO was Arm, which achieved a remarkable valuation of $54.5 billion. This valuation was attained after pricing its IPO at the upper end of the expected range. The IPO raised a substantial $4.87 billion, benefiting SoftBank (9984.T), the majority shareholder, which still maintains a significant 90.6% stake in the company.
In 2016, the Japanese investment giant acquired Arm for $32 billion and has been exploring ways to reduce its stake since at least 2020, when it struck a $40 billion deal to sell Arm to chipmaker Nvidia (NVDA.O). Unfortunately, this plan had to be abandoned due to regulatory obstacles.
Since then, the focus has shifted towards taking Arm public through an IPO, although this path also faced challenges, including disagreements with the British government, which advocated for Arm to be listed in London. Despite Arm’s recent successful stock market debut, its valuation of $64 billion last month when SoftBank purchased the remaining 25% stake from its Vision Fund unit is a step-down.
However, the CEO of Softbank, Masayoshi Son, remains optimistic about Arm’s future, according to Arm’s Chief Financial Officer, Jason Child. Son’s primary concern is not the current stock price but rather where the company’s value will be in the long term.
Assessing Arm’s Path Forward in the Evolving Tech Hardware Landscape
Arm holds a crucial position in the tech hardware landscape, as its chip designs power most smartphones globally. It was recently revealed that Arm’s annual revenue had experienced a 1% decline, mainly due to downturns in its two largest markets: smartphones and personal computers.
Child believes that Arm can still increase its sales, as it now receives a 5% royalty rate on chips manufactured with the latest technology, compared to the previous 3%. Premium smartphones are more likely to incorporate Arm’s advanced technology.
Bankers familiar with the IPO project have drawn comparisons with circuit designer Cadence Design Systems, which trades at 35 times its projected 2025 earnings. In contrast, Arm, at $51 per share, trades at 29 times its earnings.
Over the past year, investors have shifted their focus towards profitability, avoiding startups that burn through cash but received high valuations in 2021 due to a booming year for deals. According to LSEG data, as of last Friday, the ten largest U.S. IPOs from the past four years have seen an average decline of 47% from their closing prices on the first day of trading.
Influence of Softbank on Arm’s IPO and Nasdaq’s Prospects
For those who purchased shares at the peak of the typical intra-day price spikes that often accompany high-profile IPOs, the average loss is even steeper at 53%. Jordan Stuart, a portfolio manager at Federated Hermes, noted, “The deal was priced within its range, which tells me that investors are price sensitive and boards and investment banks are showing a little bit of humility.”
While Arm’s successful debut may encourage other technology firms to pursue their IPOs, it doesn’t necessarily signify a return to the exuberant market of 2021, Stuart suggested. Sectors like biotech are likely to remain relatively quiet for the next one to two years until interest rates start to decline, making stocks more appealing compared to bonds.
Stuart added, “You will see not only a discernment among investors but some sectors completely absent from the market until the rate regime changes.”
Arm’s debut is also expected to benefit Nasdaq, the chosen listing platform, by potentially enhancing its future revenue growth prospects. Significant deals like Arm’s listing offer Nasdaq short-term publicity while representing a long-term investment to augment the recurring revenue generated from annual listing fees, as indicated by analysts.
According to Andrew Bond, Managing Director and Senior Fintech Analyst at Rosenblatt Securities, “Anytime it (Nasdaq) gets a new listed company, it’s able to drive revenue not just through the listing, but also through the other services that it sells to these listed companies on their exchange.”