2023-09-11 10:00:00
Small investors jumping into Arm Holdings’ highly anticipated IPO, when the British chip designer begins trading this week, should be wary: Individual investors often get burned when they jump in on IPOs which are on the rise.
Arm’s goal of raising about $5 billion in New York in what could be the largest IPO of 2023 follows other major IPOs in recent years, including Returns have been mostly disappointing.
Because Arm, which is owned by Japan’s SoftBank Group, is not well known among consumers, it is focusing its IPO marketing efforts on institutional investors, people familiar with the deal said.
Ordinary investors will therefore need to purchase Arm’s shares at potentially higher prices once they begin trading. With individual investors holding on to their stocks for less than a year on average, recent history suggests they could be losing money, a Archyde.com analysis shows.
The 10 largest U.S. IPOs over the past four years have lost an average of 47% from the closing price on their first day of trading, according to analysis of LSEG data as of Friday. Investors who bought at the height of the intraday price surge that often occurs during high-profile IPOs would have fared even worse, with an average loss of 53%.
Only two of the stocks in this top 10 are up from their IPO price: software seller Snowflake and Airbnb, which comes out on top with a return of 111%.
While it is common knowledge that investing in individual stocks is a risky activity for amateur investors, the analysis highlights how perilous it can be to buy shares of blockbuster IPOs on day one .
Even institutional investors invited to subscribe to these 10 IPOs before trading began would have lost an average of 18%.
The S&P 500 has gained an average of 13% since each of these IPOs, nine of which occurred in 2020 and 2021.
“If you buy into the market, on average you’re buying at a higher price than the offer price,” said Jay Ritter, a University of Florida professor who studies IPOs. “For almost all retail investors, the best strategy is to buy and hold a low-cost index fund.
Arm’s debut and upcoming listing of grocery delivery service Instacart are expected to rejuvenate a sluggish IPO market that has slowed over the past two years due to volatility and economic uncertainty.
Instacart will offer certain retail investors the opportunity to participate in its IPO through fintech company SoFi, according to its prospectus.
Although Arm is a business-to-business company whose brand is little known to the general public, the publicity of its IPO is likely to attract retail interest, analysts said. Nvidia, the chipmaker at the center of an artificial intelligence boom, has been a favorite among retailers this year.
Retail participation in U.S. stocks surged in 2021, fueled by low interest rates, zero-cost trading apps and social media enthusiasm for GameStop and other so-called “meme” stocks.
But Main Street investors became more cautious after last year’s stock market plunge, said Marco Iachini, senior vice president at Vanda Research, which tracks retailer trading.
“Whatever the outcome of Arm’s IPO, you will see niches of the retail community trying to participate, but it won’t be at the levels we’ve seen in some IPOs in stock market 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 comment or respond to requests for comment.
CRUSHED VALUATIONS
Arm is seeking as much as $51 per share, which could value it at more than $50 billion. It is the most valuable company to IPO in New York since electric car maker Rivian Automotive, which debuted in 2021.
Rivian’s stock value has collapsed by more than $60 billion since its IPO, as it burned through cash to ramp up production. Also among the biggest IPOs in recent years, food delivery company DoorDash’s stock lost more than half its value from its intraday high during its December IPO 2020.
Certainly, IPOs have had a rough few years. The sharp fall on Wall Street in 2022, rising interest rates and fears of a possible recession in the United States have wiped out the valuations of companies that went public before being profitable. Studies by Mr. Ritter and other researchers, however, have shown that IPOs offer only mediocre returns.
Over the past four years, more than 260 IPOs have launched with market values above $1 billion, primarily in the technology, healthcare and consumer discretionary sectors, according to LSEG. They have lost on average 29% compared to their offer price and 49% compared to their first stock market highs.
One of the big recent IPOs is chipmaker GlobalFoundries, which has gained 23% since its 2021 IPO, while the S&P 500 has fallen 3% over the same period.
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