Chip designer Arm (ARM) experienced a substantial surge in shares after its initial public offering on Thursday. Arm stock skyrocketed by over 17% in recent trades.
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The Arm IPO priced 95.5 million shares at $51 apiece, which was the upper end of the anticipated range of $45 to $51. As a result, Arm attained an initial valuation of $54.5 billion.
The IPO generated nearly $5 billion for majority owner SoftBank (SFTBY), which still retains 90% ownership of Arm stock.
In afternoon trades on the stock market today, Arm stock experienced a 17.7% surge, reaching 60.02.
Market observers questioned Arm’s initial valuation, noting that it is 36% higher than the amount Nvidia (NVDA) offered to pay for the company last year.
“When a company isn’t experiencing growth, it’s difficult to convince the market to pay such significant premiums,” said Daniel Newman, the CEO of research and advisory firm Futurum Group.
Arm’s revenue slightly declined to $2.68 billion in its fiscal year 2023, which ended on March 31, due to weak smartphone sales.
Arm Stock Valuation ‘Not Based On Fundamentals’
Every major semiconductor designer, including Apple (AAPL), AMD (AMD), Qualcomm (QCOM), Nvidia, and others, utilize Arm’s chip designs.
Currently, Arm derives 63% of its revenue from royalties and 37% from licensing. Royalties involve receiving a payment per chip sold, while licensing grants customers access to Arm’s intellectual property for developing processors based on Arm’s technology.
Research firm New Constructs stated that Arm’s valuation is “predominantly influenced by SoftBank’s manipulation of the valuation in private markets, rather than the company’s fundamentals.”
“We recommend that investors steer clear of this IPO, as we foresee limited potential for substantial gains. There are numerous other tech companies in the sector that offer investors growth at a reasonable valuation,” the analysts from New Constructs mentioned in a report.
Arm’s IPO marks the first of three tech IPOs scheduled to enter the market this month. Grocery delivery company Instacart and marketing software firm Klaviyo are set to go public next week.
Follow Patrick Seitz on X, formerly Twitter, at @IBD_PSeitz for more stories on consumer technology, software, and semiconductor stocks.
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