The first successful tech initial public offering in quite some time launched last week. I told readers at that time that I would not be buying Arm Holdings (ARM) until I saw how the stock traded. Parent company SoftBank Group (SFTBY) sold about 10% of Arm in the IPO for about $51 a share. That's where the shares were priced on Wednesday night, which was at the top of the expected range. The stock would open above $56 and trade as high as $66.28 that first day.
The shares were already expensive at $51 in my opinion. The first day's enthusiasm, which Real Money's Alex Frew McMillan wrote about last Friday, seemed overblown. The rest of the semiconductor space is already fighting off serious declines after peaking in August. On that note, I told readers that I would reduce my long position in Nvidia (NVDA) if that stock lost its 50-day simple moving average (SMA) and that is exactly what I did.
Arm then traded as high as $69 on day two, which was Friday. I had wanted to short the shares up there but I was focused elsewhere at the time. I pulled the trigger at $67 (told my Twitter followers for verification) with the intent to short more. The stock closed down 4.47% on Friday, or almost 12% below its high for the session, at $60.75. Arm was trading around $58 shortly after Monday's open.
As of Friday's close, ARM was trading at a rough 25 times last year's revenue (not earnings), and at greater than 100% of last year's total profit. Remember, Arm, which is a chip designer, has plans for engagement in businesses generated through the rise of artificial intelligence, but about 45% of its revenue is still produced by sales to mobile phone producers or to chip producers supplying those chips to smartphone makers. This is a business in decline, and if ARM is to show sales growth as a public company, it will need to move fast.
For those interested, this is ARM's second go-round as a publicly traded company. The company was founded in 1990 as Advanced RISC Machines and went public in 1998. The company was eventually acquired by Japan's SoftBank, which took the firm private in 2016. A deal had been in place to sell Arn to the above-mentioned Nvidia. That deal fell through in 2022 due to regulatory issues, and here we are. SoftBank still runs Arm but has now sold a 10% equity stake to the public. This leaves plenty of room for SoftBank to use this stock as a piggy bank to meet its cash needs through secondary offerings going forward without losing majority control.
The Now
Is Arm Holdings worth the $60 billion or so valuation that Friday night's closing price put on the stock? Nvidia currently trades at 41 times 12-month forward earnings and 106 times trailing 12-month earnings. Advanced Micro Devices (AMD) , which is another name that I have reduced of late when it lost its 50-day exponential moving average (EMA) and again when it lost its 21-day EMA, is a key player in PC markets as well as in the data center and probably is set up to be Nvidia's closest (but still distant) competitor in the AI-capable GPU market; it trades at 37 times forward earnings and 40 times trailing earnings. Nvidia trades at 33 times trailing 12-month sales. AMD just trades at eight times trailing 12-month sales.
ARM? I've already told you it trades at 155 times trailing earnings. ARM also trades at 25 times trailing sales. Really? Should ARM really be competing with Nvidia for valuation king, with sales stagnating and AI-related sales still in the planning stage? Should ARM crush AMD in terms of valuation, where there is already a stronghold in many markets and a finished AI-related product ready for release?
The Choice Is Yours
There are a lot of reasons to bet against the US and global economies right now. There are also reasons to bet against corporate performance on the grand scale. Perhaps the strong dollar will not be an impediment as ARM is based in the UK. There will be a push into higher-margin businesses. That said, I would fully expect SoftBank to tap the well again down the road, and probably more than once, especially if SoftBank struggles elsewhere.
Personally, and I don't have enough of a chart to do any serious technical analysis, I would be surprised to see this stock hold its IPO price. I expect to cover this short below $51. That said, I'll cover it at $65 should it go against me. Right now, this is a solid trade.I am not about to let it turn into a loser.
What would I do if I were not in the name at all? I still would not get long until we understand how it trades.
Arm Holdings will have to "show me" as if I were from Missouri. It will not get the benefit of the doubt at a time when I have been reducing my exposure to CPU/GPU designers that have already made me nice money and are run by CEOs for whom I already have a high level of respect.
