Arm’s (ARM) shares soared on the opening day on the Nasdaq Thursday. But IPO experts warn the British chipmaker’s debut on the public markets is not indicative of how other newly listed companies might perform.
Arm, a previously publicly traded company, was acquired by SoftBank in 2016. The renowned chip designer says it powers 99% of premium smartphones.
“It’s a licensing business model with gross profit margins from the mid-1990s,” Greg Martin, managing director of middle-market investment bank Rainmaker Securities, told Yahoo Finance Live. “So it’s a very different business. And I think we have to be careful about gaining insights… The next few new issuances are more likely to be representative of whether there’s a real reopening of the IPO market.”
The IPO market dried up last year, but investors are hoping for a recovery through late 2023. The next test will come Tuesday, when Instacart is expected to start trading on the Nasdaq under the ticker symbol CART. Martin also has his eye on Klaviyo, a marketing and data automation platform, and Turo, a car-sharing service.
Instacart is targeting a valuation of up to $10 billion, a far cry from Arm’s $54.5 billion valuation that made it the biggest IPO of the year so far.
The companies are also vastly different: Instacart is a consumer grocery delivery app, while Arm designs chips for smartphones.
“Arm is a mature, very established, profitable company, while most companies that go public are in an earlier growth stage and are also not profitable,” said Jay Ritter, professor at the University of Florida’s Warrington College of Business , which studies IPOs.
Overall, the IPO market was slowing down. In 2021, 1,010 IPO deals were closed per Dealogic. That dropped to 173 in 2022.
Ritter compares the current silence to similar delays seen after the stock market crash of 1987 and the Great Financial Crisis.
“What we’re seeing here is that we’ve had very slow IPOs for over a year and a half now, and the pattern is very similar to previous periods where there was a big decline and then it took several years to get back to normal,” said Ritter.
While Arm may not symbolize an IPO boom, its debut could inspire other companies to step off the sidelines.
In a note titled “The IPO market is open for business!” Goldman Sachs’ chief US equity strategist David Kostin and his team highlighted how Arm’s IPO could spur further activity.
Goldman Sachs said stocks typically rise on their first day of trading. From 1995 to 2019, IPO stocks typically rose 10% on their first day of trading. During the 2020-21 IPO bubble, the average IPO stock rose 15%.
On its first day of trading, Arm rose 24%. The shares have since sold off and are now down about 10% since the IPO.
“After a two-year drought, the US IPO market reopened in dramatic fashion this week,” Kostin wrote.
He added: “Investors should also consider valuations as companies with high price-to-sales multiples rarely outperform in an IPO.”
Josh Schafer is a reporter for Yahoo Finance.
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