Everything you need to know about the world's largest IPO this year

Shares in Softbank’s Arm Holdings (NASDAQ: ARM) rallied almost 25% on its Nasdaq debut on Thursday, marking the largest IPO of 2023 and a sign that investors are once again willing to take risks on new listings.

The IPO was priced at US$51 per share, opened at US$56.10 and a flurry of buying activity pushed it to a US$63.59 close or a market cap of US$65 billion.

Arm Holdings intraday chart on Thursday, 14 September (Source: TradingView)

SoftBank acquired Arm for US$36 billion in 2016 and received a US$40 billion offer from Nvidia back in 2022 that was ultimately scrapped due to regulatory opposition.

While the name might be grabbing headlines, many investors may not recognise Arm, what they do and why the IPO was considered such a big deal – You’ll find everything you need below.

What is Arm Holdings?

Arm is a British semiconductor company that designs ARM-based processors, where “ARM” is an acronym for:

• Advanced

• Reduced instruction set computer

• Machines

Arm designs focus on CPUs (central processing units) which are used in a wide range of devices including smartphones, laptops and networking equipment. The products are popular among chip manufacturers because they are designed to be efficient, power-saving and cost-effective. According to Statista, 99% of mobile phones have an Arm-based processor.

What makes Arm unique to household names like Nvidia (NASDAQ: NVDA) and TSMC (NASDAQ: TSM) is that it does not manufacture its product. The company makes money by licensing its designs to other firms.

Big valuation, little growth

Arm’s financials have been relatively subdued in the last twelve months (for the fiscal year ended March 31 2023 vs. prior period):

• Revenue of US$2.68 billion, down 0.9%

• Operating expenses of US$1.9 billion, down 1.9%

• Net income of US$524 million, down 4.6%

A market cap of US$65 billion – Arm trades at a price to earnings multiple of 112 and around 24x revenue. By comparison, its peers trade at revenue multiples of:

• Nvidia: 35x

• Microsoft: 12x

• Tesla: 10x

• Apple: 7.2x

• Alphabet: 6.2x

• S&P 500: 2.5x

While Nvidia might appear expensive, it's also in an earnings upgrade cycle (as Alphinity's Mary Manning explained at Livewire Live recently). The company reported 101% revenue growth in the June quarter to US$13.5 billion and said it expects to deliver about US$16 billion in the September quarter. The guidance suggest sales in the current quarter will grow 170% year-on-year.

Another SoftBank pump?

If SoftBank’s track record was anything to go by, investors should be running for the hills. According to Bloomberg, some of the biggest SoftBank-backed stocks have struggled. Here’s how they’ve performed from the offer price:

• Alibaba Group +30%

• Uber Technologies +9.0%

• DoorDash -18%

• Coupang Inc -46%

• One97 Communications -60%

• SenseTime Group -61%

• DiDi Global -75%

• Lyft -84%

SoftBank was also seen trying to get as much hype out of the IPO as possible. Reuters notes that it was oversubscribed by 12 times and could be priced between $47 to $52 per share. But the bankers agreed to leave the additional $1 per share or $1 billion in value on the table.

“They said doing so could yield a bigger pop when the stock debuts on Nasdaq on Thursday, projecting it could trade between $57 and $62 based on feedback from investors,” Reuters reported. 

So is this IPO an opportunity for investors to get in on the AI thematic or just exit liquidity for Softbank?

The largest IPO since Rivian

Nevertheless, the Arm deal has put IPOs back in the headlines and recent filings from names like Instacart, Birkenstock and Klaviyo are all projected to have multi-billion dollar valuations.

But the current crop of 2023 IPOs has left a lot to be desired. Will this be a new chapter for capital markets and risk appetite? 

Source: Koyfin

This article was originally published for Livewire Markets on Friday, 15 September 2023.