SoftBank’s Arm soars nearly 25% in Nasdaq debut
Shares in SoftBank’s Arm Holdings soared almost 25% above their Nasdaq debut price on Thursday, rekindling investor hopes for a turnaround in the moribund market for initial public offerings (IPO).
The stock, which had opened at $56.10, notched a 24.68% gain to close at $63.59, giving the British chip designer a valuation of $65bn in its return to public markets following a seven-year absence.
The IPO had priced at $51. Arm’s strong performance suggests that investor demand for initial public offerings, which had been hit hard over the last two years by geopolitical tensions and higher interest rates, may be on the rebound, market participants said.
“It is a successful IPO,” said Salman Malik, partner at Anson Funds in Toronto. “It will have a positive impact on the IPO pipeline and shows the AI theme is alive and kicking.”
Arm’s listing is being closely watched for signs of a revival in the IPO market that also awaits the high-profile listings of marquee start-ups including grocery delivery firm Instacart and marketing firm Klaviyo.
“This pop can get people more excited about the IPO market for the rest of this year and going into 2024,” said Owen Lau, senior analyst at Oppenheimer & Co.
“The Arm IPO is the most hyped listing we’ve had in the markets for a while,” said Kyle Rodda, senior market analyst at brokerage firm Capital.com.
“It will also be a major test of risk appetite and whether these high-growth, speculative companies still attract interest in a new world of higher interest rates.”
The company was taken private in 2016 for $32bn by SoftBank, which has been looking to cash out some of its stake since at least 2020, when it signed a $40bn deal with chipmaker Nvidia for Arm.
That plan, however, was abandoned by the Japanese investment giant less than two years later due to regulatory roadblocks.
Since then it has pivoted towards an IPO, though that also came with its own hurdles, including run-ins with the British government that was campaigning for a London listing for the chip designer.
Arm’s return as a public company represents a climbdown from the $64bn it was valued at last month when SoftBank bought the 25% stake it did not directly own from its Vision Fund unit.
But that has not dampened SoftBank CEO Masayoshi Son’s enthusiasm for Arm, its CFO Jason Child said. “He is quite bullish on the company.”
“The price today or even in the near term isn’t really his focus, the focus is where's the price gonna be in the in the future.”
Arm disclosed last month its annual revenue had dropped 1% but was hoping to increase it at a time when its two largest markets — smartphones and personal computers — are in a slump.
Child said Arm can still increase its sales as it was reaping a 5% royalty rate on chips made with the newest technology versus 3% with the previous version. Premium phones are more likely to use Arm's most advanced technology.
Investors have over the last year begun to pay more attention to profitability, shunning cash-burning start-ups that had in 2021 fetched lofty valuations on the back of a record year for deals.
The 10 biggest US IPOs of the past four years are down an average of 47% from the closing price on their first day of trading, according to the analysis of LSEG data as of Friday.
Investors who bought at the top of an intraday price surge that often occurs in high-profile listings would have fared even worse, with an average loss of 53%.
Arm has positioned itself as indispensable in the tech hardware ecosystem as its chip designs power nearly every smartphone in the world, from Apple’s iPhones to Samsung’s Android-based devices.
However, almost a quarter of Arm’s revenue comes from an entity it does not control but nonetheless relies on access to China's huge smartphone market.
“Despite some concerns about its exposure to numerous risks in China, it's not stopped a juggernaut of enthusiasm, with the IPO oversubscribed multiple times,” said Susannah Streeter, head of money and markets, Hargreaves Lansdown.
Arm’s debut also gives the Nasdaq, which won the listing, a potential boost to future revenue growth.
Large deals like Arm provide the Nasdaq with short-term publicity and is a long-term bet to boost recurring revenue the exchange collects from annual listing fees, analysts said.
“Anytime it (Nasdaq) gets a new listed company, it's able to drive revenue not just through the listing, but also through the other services that it sells to these listed companies on their exchange,” said Andrew Bond, MD and senior fintech analyst, at Rosenblatt Securities.
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