Arm's Blockbuster IPO: Big Names and High Expectations

The market’s biggest winners are frequently stocks that made their public debut within the past few years, which is one reason why the September 14 initial public offering of Arm Holdings plc NASDAQ: ARMH is getting so much attention. 

The U.K.-based chip designer raised nearly $5 billion. The company priced 95.5 million shares at $51 apiece. That pricing was at the high end of its expected price range of $47 to $51.

There’s been some behind-the-scenes drama surrounding Arm’s IPO.

In 2020, Nvidia Corp. NASDAQ: NVDA said it would buy Arm from Japanese holding company SoftBank for $40 billion, but the Federal Trade Commission and U.K. regulators put the kibosh on the deal, saying it would harm competition.

When Nvidia said in early 2022 that it would terminate the deal, SoftBank said it would begin preparations for an IPO.  

Prior to the IPO, Nvidia and Intel Corp. NASDAQ: INTC confirmed they planned to invest in Arm. 

Tech Hall of Fame Investors

The roster of Arm investors reads like a who’s who of big tech: Apple Inc. NASDAQ: AAPL, Alphabet Inc. NASDAQ: GOOGL, Taiwan Semiconductor Manufacturing Company Ltd. NYSE: TSM, Advanced Micro Devices Inc. NASDAQ: AMD and Samsung Electronics Co. Ltd. OTCMKTS: SSNLF are among shareholders. 

Arm set aside more than $700 million worth of shares for big techs. 

So why the excitement about this particular company?

The company has a wide reach: You can find Arm’s architecture in almost all smartphone chips, which explains why both Apple and Samsung were eager to jump on board. 

Arm’s intellectual property also powers other mobile devices, including wearables and tablets. The company also does a brisk business for sensors and Internet of Things chips. 

In media interviews, Arm chief financial officer Jason Child said the company derives a significant chunk of revenue from products released many years ago, for which it continues to receive royalties.

Recurring Revenue is Good Starting Point

Far from being a warning sign about a reliance on outdated products, that recurring revenue forms a basis from which the company can innovate and develop new products. 

Arm said it anticipates the global market for its chip designs to be around $250 billion by 2025. That figure includes revenue growth in the automotive and data center markets, both of which it’s targeted as areas of expansion. 

The sheer size of Arm’s IPO also energized investors. With the amount raised in the deal, Arm is the largest U.S. IPO this year, and the largest since the 2021 debut of electric truckmaker Rivian Automotive Inc. NASDAQ: RIVN.

Rivian, which has yet to turn a profit and is expected to continue losing money in the foreseeable future, raised $12 million in its debut based on excitement about the EV market, which has since waned. 

While it might seem that Arm is benefiting from the AI frenzy that sent all manner of tech stocks higher this year, investor enthusiasm for that theme also seems to have peaked. 

Direct AI Revenue Won't Happen Soon

In any event, analysts say any substantial revenue that Arm will directly generate from AI applications is several years down the road. 

A vibrant IPO market is crucial for the broader equity market, as it marks an injection of fresh capital. In turn, promotes innovation and offers opportunities for investors to participate in promising startups and established firms alike.

While there have been other eagerly anticipated IPOs in 2023, Arm’s offering may indicate a shift in what’s otherwise been a trickle, compared to the flood of IPOs in some years.

There have been 111 U.S. IPOs this year as of September 15, down 29% from the same date a year ago. 

It’s too early to say whether Arm will deliver the rally that many expect. Shares closed at $63.59 on their opening day, up 25% from the IPO price. They declined by 2.06% in the following session, but could easily be chalked up to some quick profit-taking, and investors shouldn’t read much into that.