IPO explanation ft. Arm Holdings

IPO Explanation Ft. Arm’s Debut

Investing in an IPO (initial public offering) could get you significant gains or potentially lose all your earnings. First, let’s ensure you know what it is, the risks and benefits, and if it’s the right opportunity for you.

With Arm Holdings being the most significant IPO of 2023, the pre-IPO opinions and post-IPO impressions can continue to play a role in forming your decisions. Ensure that the risks of IPOs are understood. Check out what happened before the IPO, followed by the reaction of Arm Holdings hitting the US stock market. 

What’s an IPO?

What’s an IPO? The initial public offering of a formerly private or foreign company that has gone public on the market.

Basically, it’s the dramatically triumphant (or plummeting) entrance of a potential investment on the market. 

Is investing in an IPO risky? Yes. Though a particular product or growth track record seems promising, there are red flags for private/foreign IPOs.

What’s the difference between a private and foreign IPO? If it goes from private to public, there’s no track record in the stock market, it is normally overvalued, there can be liquidity issues, and the potential of fraud. If it goes from foreign to available, there will be different regulations based on the country, even more liquidity issues, and the stock is exposed to different political/economic impacts, depending on the country. 

Red flags don’t mean you can’t make significant profits. However, they should be a cautionary sign. 

IPO Lemonade Stand Analogy 

If you’re unsure why IPOs can be beneficial or risky, let’s return to our Jennifer’s lemonade stand analogy. It will articulate the concept and factors to consider. 

Jennifer is launching a new type of lemonade (representing IPO): chocolate lemonade! As delicious as that sounds, she is basing the launch’s success on customer loyalty and affiliations. 

Lemonade is sold consistently at $2 a cup, but chocolate lemonade is sold for $3 because of the cost of added ingredients. 

Jennifer wants to test the new lemonade over the span of a week. She starts selling the lemonade on Monday and compares it to her regular lemonade. 

Lemonade Cups Sold Chocolate Lemonade Cups Sold
Monday 2541
Tuesday 3315
Wednesday305
Thursday 367
Friday 394

Jennifer sold more chocolate lemonade at the start of the week than regular lemonade. However, sales of chocolate lemonade started decreasing significantly following the initial introduction. The regular lemonade had a slow start but gained consistent buyers daily to beat the chocolate lemonade in overall performance. 

Customers were initially excited to try the new product (aren’t we all?), but quickly realized they didn’t like it. Apparently, chocolate lemonade isn’t the next big thing.

Jennifer stopped the production of chocolate lemonade shortly after.

This is an example of what can happen to IPOs. Due to initial excitement it may seem like a great investment that later goes downhill for too eager investors. Not every company sells chocolate lemonade. Make sure you don’t invest in the one that does.

Arm’s Pre-Debut Reported August 28th

Why does this topic matter? A company’s IPO matters when there’s a surge of attention on what could happen, especially if it’s foreign vs. private. 

The raging topic around AI development is now crossing oceans as Arm’s Holding, based in Cambridge, UK, is entering the chip manufacturing frenzy in the US. The company just submitted an F-1 registration statement to the SEC as it prepares for an IPO on the Nasdaq Global Select Market. 

What does Arm Holdings do? Arm Holding is a company that licenses its IP (intellectual property) through software to other companies who take it and design/manufacture chips. Chips are designed and created using Arm’s technology. This shows off its advanced tech plans, and now everyone wants a piece. 

Supposedly, all the major tech companies want to become initial anchor investors for the company’s IPO. What should you do? 

IPOs can be dangerous, but this one is potentially different. With the fight over who will take the lead in AI technology, Arm Holdings will play a significant role. So it automatically means it will be profitable, right? Maybe…

The Timeline: 

  • 2016: SoftBank acquired Arm Holdings for $32 billion. 
  • 2017: 25% stake in Arm was transferred to SoftBank Vision Fund. 
  • Early 2020: Arm’s Holding announces plan to go public. 
  • September 2020: Nvidia announces intentions to acquire Arm and then pays $750 million upfront for a 20-year license to Arm’s technology.
  • February 2022: Nvidia-Arm deal is a no-go because of regulatory challenges. 
  • Early 2023: Arm reported a 70% increase since the year of 2016. 
  • 2023: Nvidia is talking with Arm to determine if it will be an anchor investment, solidifying a long-term relationship. 
  • (future) September 2023: The expected IPO month for Arm Holdings.

A lot has happened.

Arm Holdings Post-Debut

When was the IPO? Thursday, September 14th, 2023, Arm was publicly traded in the United States. The initial share price was $51, with a market cap of $54 billion. A day later, the share price is now $64, jumping more than 25%, with a market cap of $68 billion. 

What was the initial reaction? Arm Holdings’ debut resulted in the Dow jumping 300 points, with the S&P 500 and the Nasdaq Composite positively increasing. 

Who has ties to Arm Holdings? The significant companies currently tied into Arm are “Apple”, with a long-term agreement through 2040; “Nvidia”, with a long-term agreement through 2040; and several others, including “Google”, “Intel”, and “Samsung”. 

The major companies investing in Arm Holdings make it appear as an automatic green flag, but there’s still more to consider for individual investors.

Should you invest? Give it a moment, IPOs typically have a downturn. Arm Holdings still has significant ties to China, exposing it to a volatile climate. The chip market is growing because of supply and demand, and various factors are still at play. Waiting could prove to be a wise decision.

Takeaways

The history of IPOs is unpredictable, but this investment or the next one could always be different. There isn’t a right answer, but this isn’t any average IPO, and since it’s cited as the biggest in 2023, it could result in a big return.

However, it’s important to keep track of Nvidia and Arm holdings and to do your research before automatically investing. The chip market is up and down, and if you’re interested in that risk, do some extra research. If you’re not interested in the risk, maybe an ETF like VOO is the way to go.