It’s poised to be one of the hottest initial public offerings (IPOs) this year.
Arm, a chip design company, is about to list its shares in the United States at a valuation of about $50 billion.
It would be the largest IPO on the NASDAQ exchange in two years.
This IPO is hot… so much so that sources close to it have said that it’s oversubscribed over five times.
Without a doubt, many more investors will have an interest in these shares once they start trading.
But there’s a problem.
Only 9.4% of Arm’s shares will become available to the public. SoftBank, the company’s largest investor, will hold the rest.
(SoftBank acquired Arm for $32 billion in 2016. Back then, its shares traded in London.)
Why is this upcoming re-listing so huge? And should you put Arm on your radar?
Arm IPO Revived a Stagnant Market
The timing of this flotation is almost perfect.
Everybody is talking about artificial intelligence and semiconductors.
These two have become the dominant topics in the financial media.
Arm, which designs chips used by Apple, NVIDIA, Qualcomm, and others, is one of the world’s leading semiconductor companies.
The company’s resilient business model, coupled with high investor interest in AI, produced this frenzy.
Investors bet that Arm will benefit from the AI boom. The company’s core segment, smartphone chips, has been flat this year. Arm hopes that its exposure to AI will change that.
However, this is not a guarantee.
Should You Pay Attention to Arm?
AI is a new and powerful trend, and Arm is trying to capitalize on that.
However, the company has yet to prove that its revenue and profits will benefit from it. So far this year, Arm’s operating statistics have been quite disappointing.
In the second quarter, the company reported a small drop in revenue compared to the same quarter last year and a 53% decline in profits.
The reason for this is that Arm is, first and foremost, a smartphone chip company, not an AI-first company.
It may become a major player in the AI space, but right now, it’s not a direct competitor to companies such as NVIDIA, which reported stellar results in the second quarter.
The uncertainty of Arm’s changing business model creates a risk and an opportunity.
Investors who will be buying shares post-IPO will be betting that Arm is going to become an AI heavyweight.
However, they will be taking a lot of risk.
This deal is overheated, and the company’s lagging fundamentals may not support lofty share valuations in the quarters to come.
In other words, some investors fighting for Arm’s shares today may be disappointed with the company soon.
Unless they are willing to wait and see if Arm does become a premier AI play in the long term, they will be in for a bumpy ride. Plus, the hype generated around this IPO may well turn against investors. Sentiment cuts both ways. Right now, the market is optimistic about Arm.
But if its mood changes, investors could see significant drawdowns that will also be driven mostly by sentiment and behavioral reasons.
Our take is “wait and see.” In the meantime, we would focus on an area that has a clear link to the AI trend and that, in our view, will stand to benefit from it regardless of how the Arm story plays out.
Thank you for your loyal readership,
The Financial Star team