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Arm: Investors should be careful of framing as an ‘IPO signal,’ strategist says

Arm Holdings (ARM) is making its IPO debut on the Nasdaq (^IXIC) on Thursday, September 14th. What does Arm's debut mean for the IPO market and for the future of the company? Rainmaker Securities Managing Director Greg Martin joins Yahoo Finance Live to discuss.

"We have to be careful about framing Arm as an IPO signal — it's a one-on-one company, it’s already been a public company," Martin cautions on investor hype directed at the IPO market. "So, you know, it's not a true new issuer."

He also notes new issuances like Klaviyo, Instacart (CART), and Turo are more "truly representative of whether there's a real reopening of the IPO market."

"The biggest uncertainty and the biggest area for concern… is 'is this going to power... future AI chip designs?'" Martin speculates on Arm’s growth outlook and liquidation risks from its majority stakeholder SoftBank (SFTBY, 9984.T).

Video Transcript

JULIE HYMAN: The highly anticipated public debut of chip design firm Arm is going to put investor appetite for the AI hype to the test. Arm's public debut pulling the IPO market into focus after pricing its blockbuster IPO at the top of the range at $51 per share. Here with more on what may lie ahead for Arm and the broader market, we have Greg Martin, Rainmaker Securities Managing Director.

And as we've been talking about, Arm doesn't do AI right now to be clear, but it looks like it's going to do it in the future. And so that's part of the investment proposition here. But Greg, tell us how you're framing and how you're thinking about Arm as a signal.

GREG MARTIN: I think we have to be careful about framing Arm as an IPO signal. It's a one-of-one company. It's already been a public company. So it's not a true new issuer. It was taken private by SoftBank, and now divesting just 10% of their stake. And so we have to be very careful. It's obviously a ubiquitous chip design in 99% of our smartphones.

It didn't grow last year. But it has huge growth potential, as you mentioned, in AI. But that's still on the come. And it has an unusual business model. It's a licensing business model with mid-nineties gross profit margins. So it's a very different company. And I think we have to be careful about drawing insights.

Other than, it's good to see investor receptivity for a company going public. But I do think that it's more about how it was priced and how bankers are thinking about ensuring that there is an IPO pop to stimulate more demand in the next new issuance, which the next few new issuances which I think are more like truly representative of whether there's a real reopening of the IPO market.

BRAD SMITH: Which issuance will be the most representative of that then?

GREG MARTIN: I look at Klaviyo, I look at Instacart, I look at Turo, which sort of recently filed. I think these are companies that haven't been public before. You know, they have some new business models. They are tech companies that are only 10 years old as opposed to Arm, which has been around for a long time.

I just think those are companies where it's going to be a truer test of whether investors are going to take risks on relatively new companies that are more of the venture-backed startup variety versus Arm, which is a very mature unique one-of-one company.

JULIE HYMAN: There's another aspect of the Arm story that I want to ask you about if we could see other examples of this. First of all, SoftBank is only selling 10% of it. Secondly, Masayoshi Son, the chairman of SoftBank reportedly was very involved in the pricing discussions and wanted to price it at say, 51 versus 52. He was less concerned about leaving money on the table than sort of having a good result in the market. Is that going to become, is that becoming, or going to become more typical, do you think?

GREG MARTIN: Yeah. Listen, I think it's important. And of course, they are only selling 10%, so taking a little bit of a discount on a smaller stake to maybe create more of a halo effect for their larger stake. I mean, the IPO business is a little bit of psychology. You want to create momentum around your company. You want to create an upward trend.

And you know, it's been historically characterized by a 10% to 15% pop for investors. And that creates a story, there's a lot of press around that. And so I think that's really more of what he's trying to create here. And obviously, there hasn't been much of an IPO market. And so I think a lot of press and other investors are paying close attention to this one and the other ones I mentioned. And so I think that's more important to him than extracting an extra couple of dollars out of the initial pricing of the deal.

BRAD SMITH: Is it a risk to investors who are in on this IPO, companies who are getting in on this 10 times oversubscribed IPO that you have a SoftBank that still has 90% that could decide to also liquidate some of that holding in the future?

GREG MARTIN: It's definitely a risk. I think the risk in this situation was mitigated a lot by-- I mean, if you just look at the way they went and built their book here, you know, 735 million came from customers, big customers. So that gives investors a lot of comfort that-- and people who are going to be buying the designs are also buying into the valuation of the company.

But certainly, there's a future liquidity risk if SoftBank when the lockup expires you know decides to sell more shares. But this is a unique company. It's incredibly profitable. It's got one of the best business models on the planet. It's ubiquitous. And I think the biggest uncertainty and the biggest area for concern and obviously investors have bought into it is, is this going to power future AI chip designs.

Obviously, Nvidia bought into the IPO, is a big potential customer, tried to buy this company a few years ago. So there's a lot of positive data points that would suggest that Arm will be one of the key design components of future AI chips. And I think that's why we saw such demand for this IPO, but you know, I think to me, the fact that the company hasn't been growing and still hasn't demonstrated revenue in AI is probably the bigger risk than the liquidity the liquidation risk from SoftBank.