The Risks Of IPOs, Including The Much-Anticipated ARM

The term “Initial Public Offering” (IPO) is used to describe the process by which a previously private corporation first offers its shares to the public. ARM, based in Cambridge, England, is a multinational semiconductor and software design firm. It’s responsible for creating the processing architectures that run most mobile devices on the planet. The chip designer is set to list imminently in what’s expected to be the biggest US stock market flotation of the year.

Investing in IPOs often appeals to investors for several compelling reasons. First and foremost, there’s the potential for substantial returns, especially when the IPO is associated with prominent brands or groundbreaking technology firms. IPOs provide an opportunity for investors to engage with a company during its initial stages in the public market, hoping to capitalize on its prospective growth.

Furthermore, these offerings often receive significant media attention, heightening their allure and creating a palpable sense of urgency among the investor community. They can also serve as a gateway to nascent industries or novel technologies, thus allowing investors an avenue for portfolio diversification.

Additionally, belief in a company’s overarching vision, its product offerings, or its leadership team can be a strong pull for potential shareholders. Historical narratives of companies that began their journey with IPOs, like Amazon or Google, and subsequently achieved monumental success, reinforce the attractiveness of such investments. This allure is further amplified by a phenomenon known as the “Fear of Missing Out” or FOMO, where investors, influenced by others’ profitable ventures, don’t wish to be left behind. Lastly, an essential aspect of IPOs is the liquidity they offer. Unlike certain investments like venture capital, IPO shares are traded in public markets, making it relatively straightforward to liquidate one’s position.

About ARM

ARM’s processors are built on the streamlined and efficient RISC architecture, as opposed to the CISC architecture utilized by most other chip manufacturers. In turn, this improves the battery life of mobile devices equipped with ARM CPUs.

SoftBank Group, the current owner, is responsible for bringing ARM to the public. The company has made significant investments in new enterprises and faces several financial challenges. SoftBank is a multinational Japanese corporation that controls ARM. The company is going public to raise capital and provide investors with the opportunity to own a portion of the business. SoftBank acquired ARM for $32 billion in 2016. The company has attempted to sell ARM for several years, but antitrust concerns have complicated the transaction. In 2020, Nvidia Corp agreed to acquire ARM for $40 billion, but the transaction was blocked by U.S. and European Union regulators. There are four main reasons for the IPO:

  • SoftBank is attempting to increase its capitalization to finance additional investments. SoftBank anticipates raising billions from the IPO.
  • To provide investors with the opportunity to acquire a stake in ARM, which is a successful and promising business. Investors will have the opportunity to purchase stock in the company through the IPO.
  • For ARM, a private firm now, to become publicly traded. ARM’s IPO will establish the company’s credibility as a public entity, which will facilitate its future mergers and acquisitions.
  • ARM is a top chip designer that could help spur more competition in the industry. Competition in the semiconductor market is likely to expand because of the IPO, which is good news for buyers.

The rapid increase in smart devices, both for regular consumers and businesses, has led to a higher demand for computer chips that can perform more tasks efficiently while using less power. Three decades ago, personal computers (PCs) were the primary devices for people to use at home, work, or school. But then, mobile phones turned into small computers we carry in our pockets, and digital televisions transformed into computers in our living rooms. Nowadays, vehicles have become like computers on wheels, and the servers and networking equipment serve as the computers linking all these devices and services. Furthermore, there are billions of small, affordable devices, such as sensors and electric motor controllers, which now function as computers too. Each of these computers requires at least one central processing unit (CPU), and often even more. This trend has been a major factor behind the significant growth of ARM-based chips over the past several years.

Why You Should Be Cautious

The share of companies in the United States which were profitable after their IPO has been decreasing year-on-year over the past decade from a peak of 81 percent in 2009. In 2021, only 28 percent of companies were profitable after their IPO and it’s on a decreasing trend.

Also remember, the bigger the hype, the bigger the promoter needs it to be a success. The company has selected four investment banks to lead the listing – Goldman Sachs, JPMorgan Chase
, Barclays, and Mizuho Financial Group. ARM is big and hyped and reputations are at stake. Not all big advertised offerings have been a success.

WeWork is a shared workspace company that was valued at over $47 billion in its IPO in 2019. However, the company’s valuation quickly declined, and it was forced to withdraw its IPO filing in September 2019. The company’s problems were attributed to its high valuation, its lack of profitability, and its corporate governance issues. After a CEO change and restructuring (incidentally by Softbank), In March 2021, WeWork announced that it would finally go public again through a merger with a special purpose acquisition company (SPAC) named BowX Acquisition Corp. This deal valued WeWork at around $9 billion, a far cry from its peak valuation but indicative of its efforts to rebuild and reposition itself in the market.

the ride-hailing company that was valued at over $82 billion in its much hyped and advertised IPO in 2019. However, the company’s stock price declined by as much as 55%. The company’s problems were attributed to its heavy losses, its regulatory challenges, and its competition from Lyft
. It’s only just recently regained its IPO price.

I am a fan of Efficient Market Hypothesis (EMH). The theory states that share prices reflect all information currently available. The EMH hypothesizes that stocks trade at their fair market value on exchanges and all information available in the share price is factored in. Not really a difficult theory to buy into, considering technology these days. IPOs are designed to offer you an early entry into a new company (usually with huge, supposed growth prospects). What started as a good idea has turned into a money-making machine not for the investor, but for the founders and the investment banks that orchestrate the offering.

IPO Checklist For Investing

Today, an IPO has sadly been reduced to a sale of a company at the highest possible price to raise the highest amount of money possible for the owner. Does that sound like a great investment to you? So, from that standpoint, they are manufactured investments with all the current news flow priced in that start with an uphill battle for the buyer to make a return. Consider these points if you are going to invest in any IPO.

  • The marketing is geared to sell you the investment.
  • Valuations are aimed towards the higher end.
  • They only have one price to buy and no averaging, restricting value.
  • Expiring lockout periods can cause the stock to fall.
  • The investment is designed to benefit the seller.

Specifically, to ARM, there are several risks that investors should consider.

ARM’s estimated IPO valuation of more than $50 billion is too high. For a chip designer, this is a very high price tag. The stock price following the initial public offering (IPO) may fall if the company is overvalued.

It’s also possible that current market conditions are unfavorable. The stock market has been extremely unstable recently. The success of ARM’s initial public offering (IPO) could suffer if market circumstances worsen. ARM’s market share is also threatened by competition from big rival chipmakers like Intel
and AMD. These firms invest significant resources to the research and development of new processors that can compete with ARM’s offerings.

So, through the years, they have become less profitable for a couple reasons. Firstly, the market achieves efficiency more quickly on a newly listed IPO than investors can be. Secondly, the IPO’s promoters tend to be more than liberal with the truth behind the offering to sell questionable valuations with slick marketing to an unsuspecting public. It’s time to move on from the IPO space if you are looking for newly listed growth companies without fluffy packaging. However, if you do get caught up with the hype, try to control those emotions and ask yourself one question. What are you seeing that everyone else isn’t?

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