The year’s “hottest” tech IPO is off to a slow start…
On September 13, British chipmaker Arm Holdings (ARM) went public at $51 a share.
Within two days, its share price shot to $65… meaning most regular investors got in closer to $65 than $51.
Today, it’s trading back at about $51.
That’s a 21% loss from the peak price of $65.
It’s why I warned you in these pages on August 29 to steer clear of this over-hyped IPO.
Arm and its boosters were telling investors that the company would someday become the go-to supplier for AI-ready chips in smartphones.
The problem is Arm has already missed the bulk of the AI hardware build-out I’ve been writing to you about.
That means Arm won’t benefit from the rapid growth of AI.
Wall Street was hoping investors would overlook this and buy into the hype.
But as I made clear to you in August, “That would be a mistake. […] At current valuation, Arm offers more downside than upside.”
I hope you paid attention and avoided those losses.
And if you’re tempted to buy in now… don’t. As I’ll show today, this stock is still overvalued.
And make sure to stick around to the end. I’ll also pass along my golden rule for investing in IPOs. If you follow it, you’ll never fall foul of overhyped deals. You’ll also be in a position to pick up shares far below their IPO prices.
Don’t Trust Today’s IPOs
There was a time when IPOs gave regular investors the chance at potentially life-changing gains.
On its IPO day in 1997, Amazon (AMZN) was valued at $438 million. Today, it’s worth $1.3 trillion.
And since then, its shares are up 132,500%.
And every investor – big or small – could have gone along for the ride.
But today’s IPOs serve a different goal. Deep-pocketed investors use them to dump companies they no longer want at lofty valuations on unsuspecting investors.
That’s the case with Arm and its former owner, SoftBank. That’s Masayoshi Son’s Japanese investment holding company.
Son is a billionaire technology investor. And in 2016, SoftBank scooped up Arm for $32 billion.
But the company has been struggling.
No one questions Arm’s stronghold in the tech ecosystem. Its low-power chip designs are embedded in 99% of all smartphones sold worldwide.
But global smartphone sales are set to hit a 10-year low in 2023.
When Arm reported earnings for the second quarter of this year, they didn’t paint a rosy picture. Revenues shrunk by 2% versus the first quarter. Gross profits fell by 3% over that time.
And revenues for the company have been stagnant for the past three years.
SoftBank already tried selling Arm to mega-cap chipmaker Nvidia in 2020. But in February 2022, the deal fell through due to antitrust concerns from regulators.
So Son was left with a company he couldn’t sell privately that was starting to slump. This left him with one option – dump shares on the public via an IPO.
And the level of hype from Son was off the charts…
Selling a Stinker
Son is the guy who foisted failed workspace company WeWork on inventors via an IPO in 2019.
He was also an investor in FTX. It’s Sam Bankman-Fried’s cryptocurrency exchange. And it went belly-up amid accusations of fraud last November.
So, maybe we shouldn’t be surprised that Son sold the public another stinker with Arm. But it’s worth paying attention to the story he was spinning about why he was selling.
Here’s what Son said just a couple of weeks ago when Arm made its debut…
I want to keep as much as possible, as long as possible.
That’s a bald-faced lie. As I mentioned, Son tried to sell Arm to Nvidia last year.
And it gets worse. Son again…
I’m a long-term believer… I wanted to keep 100% of Arm. The only reason we are coming out and selling is because Arm is such an important company for the industry. I wanted to give investors the chance to participate in the upside opportunity.
That’s like a door-to-door salesman coming to your door and saying, “I want to sell you this ADT alarm that I was going to keep 100% for my home. But it works so well, I want to give it to you.”
If you believe that, I have a bridge to sell you.
Son was hoping he could cover up slumping sales by billing Arm as an AI company. That way, he could ride the hype around AI that’s caused Nvidia’s share price to more than triple this year.
And even now, Arm is a terrible deal.
At today’s price, the stock is trading at 91 times earnings. That’s on par with Nvidia, which trades at 95 times earnings.
The difference is Nvidia doubled its revenue while Arm’s is about flat this year.
And even if you didn’t know anything about Arm’s business, I have a simple rule that would have kept you away from the losses it’s generated since its IPO.
My IPO Investing Rule
Risk is an unavoidable part of investing. Without it, there’s no reward.
But there’s one simple step you can take to manage risk and protect your wealth. And it’s simple…
Never buy a stock within 180 days of its IPO.
Insiders like Son have to agree to “lockup” rules. These stop them from selling their shares within 180 days of the IPO.
If you followed this rule during the 2020–2021 IPO mania, it would’ve spared you a lot of heartache.
Take the cloud-computing company Snowflake (SNOW). It specializes in AI applications.
And it IPO’d at a nosebleed valuation. When its shares became available to the public, it traded at 170 times sales. That compares with a price-to-sales ratio of 4.1 for the average stock listed on the tech-heavy Nasdaq.
Snowflake went public in September 2021. And it closed its first day of trading at $253. And shares went as high as $387.
Today, it trades at about $145. That’s a 62% loss for anyone who bought in at those levels.
Or take healthcare Clover Health (CLOV). It went public in January 2021. It rallied to a high of $16.70. Today it’s trading around $1.10.
That’s a 93% loss from its peak.
Then there’s UiPath (PATH). It makes robotic automation software. Its share price started collapsing within a month of its IPO in April 2021. It’s down 71% since then.
That’s why I have a rule of waiting six months before buying. I can’t think of any stocks in recent years that kept soaring after their IPOs.
And even if a few stocks run away from you, you’ll still avoid the big losses from the over-hyped IPOs.
And if you really like the company, you can swoop in and buy at cheaper prices later.
Editor, The Bleeding Edge