Chip designer Arm Holdings (ARM) is up and running, with a rip-roaring first day of trading on the biggest Wall Street listing in almost two years. But, with only 10% of the company in the public float, should you be buying the stock now?
Let the first-day frenzy die down. Arm's owner, the SoftBank Group (T:9984) (SFTBY) , kept the price of and the interest in the stock high by only selling a relatively small sliver of the British chip designer into the market. Much of the stock was snapped up by key customers keen to ensure a steady supply of blueprints for their own chips. So we are not seeing a realistic picture of how ARM will trade right now.
Arm shares jumped out the gate like a racehorse on Thursday, and ended the day with a 24.7% gain. They finished at US$63.59, near their high for the day, and netted those investors strong paper gains for a stock that listed at US$51.
Interestingly, the closing price gives Arm a market capitalization of US$65 billion. That's almost exactly the valuation that SoftBank set on the company when it bought back the remaining 25% of the company that it did not directly own from the Vision Fund that it runs. Arm's IPO is the largest since 2021, when the electric SUV and truck maker Rivian Automotive (RIVN) listed at a valuation of US$66.5 billion in November 2021.
There was some confusion about the listing price, with The Wall Street Journal at first reporting that SoftBank had priced the IPO at US$52, which would have been above the indicative range of US$47 to US$51. It seems SoftBank founder Masayoshi Son correctly adjudged that it was not a good look to offer investors the shares at one price, then hit them up for an extra US$1 per share at the last minute. While the investment bankers on the deal said the demand was there to do that, Son settled on leaving a little money on the table, keeping everyone happy, and getting an extremely strong first day of play.
We can look to how SoftBank has traded Friday for a bit of guidance on where Arm might go. SoftBank shares rose just 2.1% in Tokyo on Friday, on a day the broad-market Topix rose 1.0%, leaving the stock up 5.5% for the week. Since SoftBank still owns just over 90% of Cambridge-based Arm, it is a proxy way of gaining Arm exposure if you are dead set on doing so. And the bump has been modest.
SoftBank shares have advanced by one-third (32.8% as of Friday's close) since late May, as the plans to list Arm came together. I expect its gains to continue into next year. The stock rise in Tokyo trade has coincided with a resurgence in the kinds of tech stocks that SoftBank has bought into over the years, while Son should have US$65 billion or more to play with as he looks to place bets on new tech, particularly Artificial Intelligence.
So SoftBank will be a stock to watch. The group's market capitalization in Tokyo is "only" US$66.8 billion, even though it netted US$4.87 billion in the Arm listing and retains a 90.6% stake in the British company, which it intends to continue to run as an independently operating subsidiary. At Thursday's close, the Arm stake alone is worth US$59 billion. The more Arm's value rises, the more SoftBank will lift, too.
So you could say SoftBank shares are a far better deal than Arm. There's no shortage of free float for the Japanese company to artificially push up the price. Bear in mind, though, that SoftBank is essentially now a venture-capital fund, and it has stumbled badly with its recent bets. Arm has turned SoftBank a tidy profit from the US$32 billion that SoftBank spent to take it private in 2016. Will that turn the tide for SoftBank?
Arm is an interesting IPO because a) this is not the first time it has listed and b) it is an established business. You are not buying into a dot.com company with a premise and the promise of future profits.
The company took the name Arm Holdings when it listed in London and on Nasdaq in 1998, but the precursor business dates back 40 years. Apple (AAPL) was an early investor and has been a key customer ever since. Its bread-and-butter business is designing chips that go into smartphones, and it's virtually guaranteed you own a device that contains Arm tech. Its designs are used in 99% of the world's smartphones.
That business has been slowing because consumers have been cutting back on tech purchases in the face of inflation. Arm promoted the stock offering on its newer lines of chips, and says it has a 10.1% share of cloud-computing semiconductors, as well as 40.8% of the designs for chips that go into automobiles. It makes royalties off its designs.
Because Arm designs chips that also go into smart home devices, computer networks and more, it's relatively agnostic when it comes to the exact brand and business. It will continue to grow as long as it remains popular for companies to make their own chips rather than simply buying off-the-shelf semiconductors. The more companies that are making chips, the more customers there are for its designs. While its chips help control the engine and chassis of conventional cars, for instance, the advent of autonomous driving increases demand for that line.
Arm China, an independently owned business, is its biggest customer, accounting for around 25% of sales, but its other key clients bought into the offering. Apple became a cornerstone investor once again, alongside chipmaker Advanced Micro Devices (AMD) , Google's parent Alphabet (GOOGL) , Intel (INTC) , Nvidia (NVDA) , Samsung Electronics (KR:005930) and Taiwan Semiconductor Manufacturing Co., better known as TSMC (T:2330) (TSM) .
I see that Arm's shares are trading higher by the tune of another 7% or so in premarket trading, so we should see another solid day for ARM today. Let the dust settle a little to see how it continues to trade after that. It's already reported June earnings in its prospectus, so the September quarter will be the next set of numbers we see, and I'll be scouring that for guidance about its growth in new lines of business. There may be a chance to buy in at that point.
It looks like smartphone sales will continue to slow, holding back its main business. So the future for the stock will depend on its growth in areas such as AI and cloud computing. For now, you'd be getting a virtually free stake in SoftBank's other holdings by buying into that stock, backed as it is by the Arm stake.
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