Analysis: For retail investors, jumping on Arm's blockbuster IPO is a risky business
11/09/2023 11:00
By Noel Randewich and Hannah Lang
Sept 11 (Reuters) - Retail traders getting their first
bite at Arm Holdings' highly anticipated public offering when
the British chip designer begins trading this week should
beware: individual investors often get burned when they jump on
hot listings.
Arm's goal of raising around $5 billion in New York in
what might be the biggest IPO of 2023 follows other major
listings in recent years whose returns have mostly disappointed.
Since Arm, owned by Japan's SoftBank Group's 9984.T , is
not well-known among consumers, it is focusing its IPO marketing
efforts on institutional investors, people familiar with the
deal said.
That leaves Main Street investors to buy Arm shares at
potentially higher prices once they begin trading. With retail
investors holding individual stocks for less than a year on
average, recent history suggests they could lose money, a
Reuters analysis shows.
The 10 biggest U.S. initial public offerings (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
intra-day price surge that often occurs in high-profile listings
would have fared even worse, with an average loss of 53%.
Only two of the stocks in those top 10 are up from their IPO
prices: software seller Snowflake SNOW.N and Airbnb ABNB.O ,
which leads with a 111% return.
While dabbling in individual stocks is a notoriously risky
business for amateur investors, the analysis underscores just
how perilous it can be to buy into blockbuster IPOs on Day One.
Even institutional investors invited to buy into those 10
IPOs before trading would be down an average of 18%.
The S&P 500 .SPX has gained an average of 13% since each
of those IPOs, nine of which happened in 2020 and 2021.
"If you're buying in the market, on average, you're
buying at a premium to the offer price," said Jay Ritter, a
professor at the University of Florida who studies IPOs. "For
almost all retail investors, buying and holding a low-cost index
fund is the best strategy."
Arm's debut and an upcoming listing from grocery delivery
service Instacart are expected to rejuvenate a lackluster IPO
market which has slowed over the past two years due to
volatility and economic uncertainty.
Instacart will be offering some retail investors a chance to
buy into its IPO via underwriter fintech company SoFi, its
prospectus said.
While Arm is a business-to-business company with little
consumer brand recognition, its IPO publicity is likely to
attract retail interest, said analysts. Nvidia NVDA.O , the
chipmaker at the center of an artificial intelligence boom, has
been a retail favorite this year.
Retail participation in U.S. stocks surged in 2021, fueled
by low interest rates, zero-cost trading apps, and social media
hype around GameStop and other so-called meme stocks.
But Main Street investors have become more cautious after
last year's stock market sell-off, said Marco Iachini, a senior
vice president at Vanda Research, which tracks retail trades.
"Whatever comes out of the Arm IPO, you'll see niches of the
retail community trying to get in on it, but it's not going to
be at the levels we saw in some of the IPOs in 2021," he said.
Spokespeople for Arm and SoFi declined to comment.
Spokespeople for Instacart and the 10 companies whose IPOs were
analyzed did not provide comment, or did not respond to comment
requests.
CRUSHED VALUATIONS
Arm is seeking up to $51 per share, potentially valuing it
at more than $50 billion - the most valuable company to list in
New York since electric carmaker Rivian Automotive RIVN.O
debuted in 2021.
Burning through cash to ramp up production, Rivian's market
value has collapsed by over $60 billion since it listed. Also
among the biggest IPOs in recent years, food delivery company
DoorDash's DASH.N stock remains down by more than half from
its intraday high on its December 2020 debut.
To be sure, it has been a tough few years for IPOs. Wall
Street's steep sell-off in 2022, along with rising interest
rates and fears of a potential U.S. recession, have crushed
valuations of companies that went public before they were
profitable. But studies by Ritter and others have shown IPOs
offer poor returns.
In the past four years, over 260 IPOs have debuted with
stock market values above $1 billion, mostly in the technology,
healthcare and consumer discretionary sectors, according to
LSEG. They are down on average 29% from their offering prices
and down 49% from their initial trading highs.
One standout among recent big IPOs is chipmaker
GlobalFoundries GFS.O , which has gained 23% since its 2021
listing, compared to the S&P 500's 3% dip over that time.
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Mostly poor returns from major IPOs https://tmsnrt.rs/3sOTvY8
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(Additional reporting by Lance Tupper, Anirban Sen and Echo
Wang; editing by Michelle Price and Richard Chang)
((noel.randewich@tr.com))