95% of the world’s smartphones rely on a single company.
And it’s set to go public later this year.
The largest tech companies like Google and Intel are lining up to be lead investors.
But I’m not buying it.
The company in question is Arm, and it is one of the premiere chip design firms in the world.
Chip technology from Arm is found in every Apple product from the iPhone to the iMac. Over 160 billion chips using Arm’s designs.
Arm designs deliver the performance required to make a modern smartphone run fast. All while using less energy than other chips. That allows for longer battery life.
And this makes it perfect for the smartphone market.
But I’m seeing something that regular investors might not be looking at. There are three reasons why I won’t be buying Arm after its IPO later this year.
When the iPhone was released in 2007 it launched a wave of innovation. Each year was met with better battery life, cameras, and features.
But in the present day, the pace of innovation in smartphones has slowed – and so have sales.
The problem is that smartphone shipments in the U.S. peaked in 2016 around 163 million. And that figure has been trending down ever since. And during the fourth quarter of 2022, smartphone sales declined over 18% – the largest quarterly decline yet.
So, Arm’s core business – providing components for smartphones – isn’t the place to look for growth. Fortunately, Arm doesn’t just rely on smartphone sales. But the decline in smartphone shipments will force Arm to compete in areas where their designs are less proven.
And there’s another problem for the IPO…
Arm is on track to be the largest IPO of the year. The latest figures I saw suggest Arm will debut somewhere between $30 billion and $70 billion. The problem is that large IPOs over the past few years have been a trap for retail investors. I don’t want you to be one of them.
Of the top 10 IPOs in 2021, only one company has a positive return.
Other IPOs from 2021, like Coinbase and Rivian, have only lost investors money.
Seven of the 10 largest IPOs from 2021 are down 50% or more.
Last year was not much better.
Six of the top ten largest IPO stocks are down.
Large IPOs like Arm benefit Wall Street and the insiders that are selling. Softbank’s Vision Fund owns 25% of the company and is looking to cash in on the rise of technology stocks in 2023.
For these reasons I don’t recommend buying an IPO stock for at least 180 days after the company has gone public. Arm will be no exception.
Arm has a near monopoly in the smartphone and tablet market.
And a new chip design takes years to develop and test. That means Arm’s dominance is safe for now.
But a rival open source architecture is gaining popularity. In January, Google announced that RISC-V will come to Android.
Currently only the x86 and Arm standard is supported. Android is the most popular mobile operating system in the world with a 71% market share.
RISC-V is an open source architecture. That means it doesn’t require a licensing fee like Arm and x86 designs require.
As smartphone shipments decline, lower prices might be one solution to boost demand.
It also gives smartphone makers more freedom to custom build chips that suit its needs.
With Arm having to publicly report earnings every quarter, the pressure will be to deliver profits. One way the company can do this is by raising licensing fees. That would make RISC-V even more attractive for smartphone makers.
This week I’ll be attending the 2023 Andes RISC-V Con in San Jose, California. And I’ll share all the exciting developments with this open source architecture in coming letters.
But for now, I’m recommending you stay far away from Arm when it goes public.
Editor, The Bleeding Edge