Arm's IPO And Its Implications For Upcoming IPOs: A Detailed Analysis

Author: Ricardo Goulart                                                                                                                                                                                                           Sept. 18 2023

Initial public offerings (IPOs) have long been a favored method for private businesses to raise funds, broaden their investor base, and gain access to a wider market. Even with the more recent rise of unconventional funding and listing methods like direct listings and special purpose acquisition companies (SPACs), the appeal of traditional IPOs endures. This report will focus on the Initial Public Offering (IPO) of Arm Holdings and the potential implications and trends this IPO could set for future tech industry IPOs in the U.S.  

Arm Holdings' IPO and Market Reception 

Arm Holdings, the British semiconductor and software design company, entered the public market on NASDAQ in September 2023. By pricing its IPO at 51 USD per share, Arm raised a whopping 4.87 billion USD— significantly surpassing the preceding largest IPO of the year, Kenvue Inc, by half a billion dollars. This catapulted Arm's overall market valuation to approximately 54.5 billion USD (Financial Express, 2023; CNBC, 2023). 

But what was perhaps more remarkable was how the market reacted in the immediate aftermath of the listing. Notwithstanding the daunting valuation, investors propelled Arm's share price up by no less than one quarter on the first day of trading alone. This wave of buying further boosted Arm's market capitalization to an astounding 65 billion USD (New York Times, 2023; Wall Street Journal, 2023). Put another way, within a day, Arm’s market value increased by 34 billion USD compared to what SoftBank had paid for the company in 2016 (Economist, 2023). 

Implications for Tech Company IPOs 

Arm's strong IPO performance marks an end to the drought in new listings that had followed electric truck startup Rivian's IPO in November 2021. This development potentially signifies renewed investor interest in the tech industry, largely perceived as crucial for future economic growth and progress (CNBC, 2023; Economist, 2023). 

Moreover, it fosters a hope-inspiring story for prospective tech IPOs. Firms such as German sandal-maker Birkenstock and grocery-delivery firm Instacart that have been planning to go public but waiting for a conducive market environment may well find inspiration in Arm’s IPO saga (Forbes.com, 2023). Watching Arm navigate this important milestone might embolden these and other companies to take the IPO leap (New York Times, 2023; Wall Street Journal, 2023). Arm's successful IPO indicates a high level of investor confidence in the tech industry, especially in companies with innovative and high-demand products or services. Prospective IPOs with promising value propositions and growth trajectories can find motivation in this development, buoyed by renewed market enthusiasm for tech companies (CNBC, 2023). 

Challenges and Risks 

While Arm's IPO and its subsequent market reception send strong positive signals to forthcoming tech IPOs, they should not be understood as eliminating all potential risk or uncertainty. Arm's healthy financial performance and leadership in chip design were surely instrumental in driving investor demand for its IPO. Companies eyeing the IPO route must be aware that investors will scrutinize not just their IPO valuation but also its grounding in factors like revenue, net income, industry standing, and growth potential (Business Insider, 2023). 

Moreover, while Arm's impressive market value indicates investors’ high trust in its future prospects, the significant discrepancy between its IPO valuation and financial performance highlights some inherent risks. For example, the concern of potential disconnect between a company’s IPO valuation and its financial performance could be a source of substantial volatility or discomfort for some investors in the post-IPO phase (Economist, 2023). 

Further, the tech industry, including the chip-making sector that Arm operates in, comes with its unique challenges, such as regulatory risks, supply chain disruptions, and technological shifts which prospective IPOs need to consider and account for in their pre-IPO planning (Forbes.com, 2023). 

Conclusion 

In closing, Arm Holding's IPO conveys a strong message of investor confidence in the tech sector and offers important lessons for upcoming tech IPOs. Its successful debut in the public market, characterized by an impressive IPO size and post-IPO stock price surge, may well kickstart a wave of new listings in the tech industry. However, prospective tech IPOs need to appreciate that sustained post-IPO success will necessitate compelling value propositions, robust financial performance, and an ability to withstand industry-specific challenges. While Arm's IPO signals an end to the IPO drought in the tech industry, only time will tell if it indeed opens floodgates for new listings in the tech sector.  

References 

Financialexpress.com. (2023). Arm Holdings’ IPO: Shares expected to begin trading today. https://www.financialexpress.com/business/investing-abroad- arm-holdings-ipo-shares-expected-to-begin-trading-today-check-stock-pricevaluation-ticker-symbol-3243273/ 

CNBC.com. (2023). Arm prices IPO at $51 per share. https://www.cnbc.com/ 2023/09/13/arm-prices-ipo-at-51-per-share.html 

Forbes.com. (2023). The risks of IPOs, including the much-anticipated Arm. https://www.forbes.com/sites/jimosman/2023/09/12/the-risks-of-iposincluding-the-much-anticipated-arm/ 

The Economist. (2023). Arm’s successful debut may signal an end to the IPO drought. https://www.economist.com/business/2023/09/14/arms-successfuldebut-may-signal-an-end-to-the-ipo-drought

 New York Times. (2023). Arm IPO stock market. https://www.nytimes.com/ 2023/09/14/technology/arm-ipo-stock-market.html

 Wall Street Journal. (2023). Arm IPO date and stock price. https:// www.wsj.com/tech/arm-ipo-date-stock-price-6522efd1 

Business Insider. (2023). Arm shares start trading in the biggest IPO in almost two years. https://markets.businessinsider.com/news/stocks/armshares-start-trading-biggest-ipo-almost-two-years?op=1