Arm’s IPO Is Coming. What the Data Say About Its Likely Performance.

During the first half of 2023, 60 companies listed on the Nasdaq compared with 108 in 2022 and 410 in 2021 during the same period, according to Nasdaq data. The shortfall in the current year’s IPO market also extends to the amount raised, with listing companies raising $3.71 billion in the first half of this year leaving it on track to fall well behind the $181 billion raised during the IPO boom in 2021 overall and $14.8 billion in 2022. 

There has been a downbeat mood around the IPO market this year, but most companies have managed to price well enough to achieve a first-day rise. The average first-day increase in value for Nasdaq IPOs this year has been 17%, however, it has soon dissipated. The average in the first week of trading was a 7.4% fall, and the average first-month performance was a 6.9% drop, according to Dow Jones Market Data. 

The first thing to note on Arm is there aren’t many recent comparisons for Arm’s IPO. Its current owner
SoftBank Group
(9984.Japan) is aiming for a valuation for Arm between $48.23 billion and $52.33 billion. That makes it the largest U.S. IPO by valuation since 2021, when
Rivian Automotive
(ticker: RIVN) came to market with an initial value of $66.5 billion. 

Rivian is now valued at around $22 billion which gives some sense of how the market has changed, as higher interest rates have undermined investor appetite for riskier growth stocks. The Federal Reserve’s key rate now stands at a range of 5.25%-5.50%, compared with just 0.0%-0.25% through 2021. 

Arm’s targeted valuation would put it behind
Micron Technology
(MU) among the biggest chip stocks listed in the U.S., with Micron having a market valuation of around $77 billion as of Friday. However, Micron’s most recent annual net income of $8.69 billion was more than 16 times as much as Arm’s $524 million.

The few technology companies that have listed on the Nasdaq this year, as Arm intends to, don’t necessarily set an encouraging example.

China’s
XIAO-I Corp.
(AIXI) listed on the Nasdaq in early March of this year at a market capitalization of $556 million. The artificial-intelligence company’s shares dropped 15% on its first day of trading and it is down 62% overall since then.

Bullfrog AI Holdings
(BFRG) is a U.S. company which uses machine learning to analyze healthcare data. After listing on the Nasdaq in February on Valentine’s Day, investors fell out of love with the company as its share price dropped by 27% one day after the IPO and it is down 53% since it floated. 

Arm is much larger and has a much more important role in the tech ecosystem than any other company that has listed this year but it could still face skepticism. The valuation that Arm’s owner SoftBank is seeking is a hefty one, with its range indicating a trailing price-to-earnings multiple of 92 to 100 times. That could make it a tough ask for Arm to deliver the typical ‘IPO pop’—the first-day rise in price expected by the big investors who buy the bulk of shares in an IPO.

A relatively tight supply could help as SoftBank is aiming to sell about 10% of total shares outstanding in the offering. It has lined up strategic investors including
Nvidia
(NVDA), Google-parent
Alphabet
(GOOGL) and
Apple
(AAPL), among others, to invest between $25 million and $100 million each in the blockbuster IPO, according to Reuters. 

“SoftBank definitely wants the pop, and most strategic investors if you peel back the cover are traders at heart, and want to book a profit,” said Aswath Damodaran, a professor at New York University’s Stern School of Business. 

For a longer term positive performance, Arm will likely need to tap into excitement around the growth of artificial intelligence. While it doesn’t make the kind of semiconductors for AI applications that Nvidia does, its technology powers chips inside nearly every smartphone, meaning it will play an important role as users demand AI capabilities on their devices. 

“While Arm is not an AI company, their growth prospects are directly tied to the growth of the AI industry and the chips needed to enable that growth. At the valuations being discussed, investors in Arm’s IPO are betting big on that growth opportunity,” said Brianne Lynch, head of market insight at EquityZen, a platform for investing in private technology companies.

Write to Adam Clark at [email protected]