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Arm IPO could be more important than people realize: Strategist

Arm Holdings (ARM) is going public again. The stock will be making its trading debut on the Nasdaq later Thursday. Miller Tabak Managing Director and Equity Strategist Matt Maley says the chip designer's IPO "could be a lot more important than a lot of people realize." Maley fears that if the IPO "falls flat" it could be a negative for tech stocks, which jumped earlier thanks to the AI hype.

Video Transcript

JULIE HYMAN: Our next guest says Arm's IPO is coming at an interesting time. Here with more, Matt Maley, Miller Tabak Managing Director and Equity Strategist. Good morning, Matt. It's good to see you. So tell us, how are you looking at this Arm IPO and what it tells us about the market right now?

MATT MALEY: Well, I do think it's going to be interesting, like you said. The issue with what does it mean for the IPO market? If it does well, that's certainly going to help open up things more for, as you mentioned, a market that's been dormant for over a year now. And geez, almost two years now.

But I also think it's going to tell us something about this whole thing with AI. I mean, the hoopla or-- we had huge euphoria around AI in the spring. You saw any time any company mentioned AI, their stock skyrocketed. Well, this time around, we went through the earnings season, and it didn't have anywhere near as much of the impact.

In fact, Nvidia, which of course, is the most important one out there, it's trading lower than its pre-announcement level. Only slightly lower, but it has come down a little bit. So again, there's still plenty of hype surrounding it, but not the big euphoria. So if this IPO kind of falls flat a little bit, that could present some problems for the tech sector overall.

And of course, the tech sector has been very important for the overall stock market. Now, on the flip side, of course, if it does very, very well, maybe that can help the tech sector that's been kind of trading in a sideways range for a couple of months now. So this could be a lot more important than a lot of people realize.

BRAD SMITH: Matt, how significant is it that Arm is seemingly changing its revenue model, or at least how it's going to generate the large amounts of money that they've been able to kind of base their business off of coming to this point. They're changing that in at least where they're targeting licensing some of their chip designs and ultimately shifting it from the average selling price of a chip to the average selling price of the end product that it's used in instead. How atypical is that for an IPO, for a company to essentially be changing that model this close?

MATT MALEY: Well, I mean, yes, that is highly irregular. But at the same time, to a certain degree, it's a smart move. I mean, look at what's happened here with the smartphones. I mean, the demand has come way down. And I compare it to-- not just with the iPhone, Apple phone, but any smartphone. I mean, people just don't upgrade them the way they used to. I compare it to what golfers-- in the old days, golfers would get a new driver every year because every year, the distance was so much more with the new driver.

Well, now, it's just not the same so people can wait a few more years. The same thing is with the smartphones. The big, big changes aren't as big as they used to be. People aren't upgrading as quickly as they used to. And so they're shifting their focus a little bit away from the smartphone area and towards the AI. I think that's a smart move. And so even though it's a little irregular, I think it's a smart way to go.

JULIE HYMAN: Wow, you do a golf analogy, and Brad Smith's ears just perk right up. You got his attention on that one, Matt.

BRAD SMITH: I'm not sure who showed you my purchase history, Matt, but you got me.

MATT MALEY: You and me are in the same boat.

JULIE HYMAN: So Matt, as we look then to zoom out on tech, we look at Arm and the demand that we're going to potentially see today. Certainly, we saw the demand with the private placement for this IPO. What do we do with tech right now? Where are we with tech right now, given that even if the Fed doesn't raise next week, we might see a raise in November? So what is the backdrop for that group?

MATT MALEY: Well, I mean, you know, again, the tech group is still-- we all like to talk about, there's going to be rotation away from tech, and you're not going to be as much of the leadership group. But that, of course, hasn't been the case at all. When the tech group rallied strongly in the summer, the whole market rallied. When the tech group rolled over in the first half of August, market rolled over, et cetera, et cetera. It's been going on ever since.

So it's going to be really important. And the thing is, with interest rates remaining high, even if the Fed has stopped-- even if they stopped what I think they likely have, stopped raising rates, they're still elevated at a high level. I still think they're going to keep them higher for longer. That creates headwinds for the tech group.

But also the group is still expensive. I mean, a stock like Apple is trading at 29 times earnings. That's lower than it was 32 times earnings at its high a month and a half ago. But it's still expensive. And with interest rates the way it is, it's hard to justify these higher valuations. So I mean, the group has done nothing for several months.

It's been trading in a sideways range since May. So we really need more help from them if the overall market is going to rally further. That doesn't mean there's going to be some good opportunities in other areas. But tech is definitely, let's say, floundering. I don't want to overstate this. It's just that we've lost that momentum because the euphoria surrounding AI is subsided quite a bit.