Shares in SoftBank’s Arm Holdings soared almost 25 per cent above their offer price in their Nasdaq debut on Thursday, valuing the British chip designer at US$65 billion in its return to the public markets after seven years.
The stock opened at US$56.10 per American Depositary Share compared with the initial public offering (IPO) price of US$51, and closed at US$63.59, notching a gain of 24.68 per cent.
The first-day jump bodes well for companies that have been waiting to list after the IPO market collapsed due to the war in Ukraine and Federal Reserve interest rate hikes.
“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.
High-profile names including grocery delivery service Instacart, German footwear maker Birkenstock, and marketing automation platform Klaviyo are preparing to go public in coming weeks. If those IPOs succeed, they will likely trigger a wave of stock market launches in 2024, bankers and analysts said.
“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.”
Arm secured a valuation of US$54.5 billion on Wednesday after pricing its IPO at the top end of the marketed range, netting US$4.87 billion for SoftBank, which still holds a 90.6 per cent stake.
The Japanese investment giant took Arm private in 2016 for US$32 billion. It has been looking to cash out some of its stake since at least 2020, when it agreed to sell Arm to chipmaker Nvidia in a US$40 billion deal. It had to abandon that plan 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 which was campaigning for the chip designer to list in London.
Despite a strong showing on Thursday, Arm’s debut marks a climb-down from the US$64 billion it was valued at last month when SoftBank bought the 25 per cent stake of Arm it did not directly own from its Vision Fund unit.
But that has not dampened SoftBank CEO Masayoshi Son’s enthusiasm for Arm, the chip designer’s Chief Financial Officer Jason Child said in an interview on Thursday.
“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 is indispensable in the tech hardware ecosystem as its chip designs power nearly every smartphone in the world. It disclosed last month that its annual revenue had dropped 1 per cent as its two largest markets – smartphones and personal computers – slumped.
Child said Arm can still boost sales as it was reaping a 5 per cent royalty rate on chips made with the newest technology versus 3 per cent 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 startups 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 per cent from the closing price on their first day of trading, the analysis of LSEG data as of Friday showed.
Investors who bought at the top of an intra-day price surge that often occurs in high-profile listings would have fared even worse, with an average loss of 53 per cent.
“The deal was priced within its range, which tells me that investors are price sensitive and boards and investment banks are showing a little bit of humility,” said Jordan Stuart, a portfolio manager at Federated Hermes.
While Arm’s strong debut will likely encourage other technology companies to move forward with their IPOs, it does not likely signal a return to the frothy market of 2021, Stuart said.
Sectors such as biotech will likely remain dormant for the next one to two years until interest rates begin to fall, making stocks more attractive relative to bonds, he said.
“You will see not only a discernment among investors but some sectors completely absent from the market until the rate regime changes.”
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, managing director and senior fintech analyst, at Rosenblatt Securities.