Arm’s Share Price Drops Below Its IPO Price - Why This Is Depressingly Normal AND A Real Problem
On Thursday of this week Arm's Ltd. stock price dropped below its IPO price.
That was fast.
In fact it was even faster than our pretty pessimistic expectations.
After popping over 25% on the day of its actual IPO the British chip designer fell 4% each subsequent trading day. Then to cap it off it fell 5% on Thursday to close at $50 and change. That was 5 straight down days.
As a reminder the IPO price was $51.
For those wondering, this is nowhere close to what the market has done. On Thursday the Nasdaq was down 1.3%. That gap is some serious underperformance.
This is....bad!
It was also so predictable. In fact, we predicted it.
Here is what we said all of 5 days ago when warning not to chase the IPO price price pop:
We would expect Arm to pop on the day it IPOs and perhaps even a short time thereafter but very quickly many of those inside buyers will take their profit and run. Where will you be?
Read our old piece here in case you missed it.
And we are in no way burnishing our laurels here. Predicting anything in the markets is very, very hard and we are not really gifted here. It is just that we have seen this particular market episode so many times that, well, it is about as close to a layup as it gets in this business.
Why?
Because the incentives are so aligned for this exact scenario to occur. Company insiders and investment banks want the highest possible share price at the start of trading and for a few days thereafter. Once an initial public offering has been all set up, the Wall Street hype machine takes over, with (some) journalists, analysts and portfolio managers getting in on the act.
All of these individuals should know better but that is beside the point.
The share price then reliably soars on the day of its debut which was no accident - it was carefully orchestrated ahead of time. Thereafter, the headlines and social media are awash reporting all the billions and billions being made and regular people get sucked into joining the frenzy.
It is a classic case of Fear Of Missing Out or FOMO. It is also a critical error.
As someone who believes regular people should invest in the markets and do it well, it is very, very frustrating.
The reason?
Because the retail investors are walking in as buyers right as all the insiders, the professional investors and those with an inside track due to a combination of wealth and influence, are selling.
It is the exact situation you want to avoid as an investor. You are buying high and for no reason other than people artificially creating a mania around a company's value. It is a fake narrative and one that typically only lasts a few days or, in Arm's case, hours.
This isn't just Arm either.
Instacart, another long awaited tech IPO that went public on Monday, has also collapsed after popping on the day itself and was flirting with heading beneath its IPO price at the time of writing.
Nor is this pattern confined to the large, heavily publicized companies that could claim to be household names. Oddity Tech, a direct-to-consumer beauty company, that went public in July has fallen steadily. It may have soared some 40% on the day it began trading but has fallen consistently since and is now at $26 a share.
This is a whooping ~$10 dollars and beneath its IPO price.
But it is important to note that many investor wouldn't have gotten in there. They might have only been allocated shares above $40 or even $50 dollars. This dramatically increases the amount an investor could have lost.
That is pretty sobering and underlines just how cautious you should be about these type of hype cycles.
In fact we were so struck by all the above that we did a deeper dive into big tech IPOs and realized that, at least to our eyes, it is difficult to find one that has done very well over the last few years.
Here is a list we came up since the pandemic in rough order of IPO date:
Rivian - down 83% from its peak, nearly 73% from its IPO price.
Rocket Companies - down 65% from its peak, 54% from its IPO price.
Snowflake - down 37% from its peak, 39% from its IPO price
Doordash - down 69% from its peak, 25% from its IPO price.
Airbnb - down 36% from its peak, though UP (!) 93% from its IPO price.
Toast - is down 69% from its peak and 53% from its IPO price.
UIPath - is down 80% from its peak and 71% from its IPO price.
Coupang - is down 65% from its peak and 73% from its IPO price.
You get the picture....
We might have missed some but we don't think so. Know a big ($10 billion+) tech IPO that has done well since the pandemic? Do send it to us at contact@pebble.finance
It is true that many of these companies went public at a very frothy time for tech companies but it is equally true that this year has been pretty strong for tech and it is quite something to have so many companies down huge amounts from going public.
60%, 80% these are huge, huge sums! And if you look at the chart, many of them have fallen like a rock right from the first day of trading.
And yes, we are also confining ourselves to tech but that is exactly the sector that gets the most hype and bleeds out into the mainstream the most.
No one is raving on CNBC or Twitter (sorry, shudder, "X") about the latest mid market industrial company or utility co divesting some assets.
Just in the last two weeks:
Arm
Instacart
and Klaviyo
Are all back around their IPO prices. These may all be tech firms, sure but one is a chip designer, another is an online grocery company and the third is an email marketing firm. These are very different companies in very different sectors and businesses and they all have the same disease.
This suggests something else going on. For one thing, it suggests that many companies will stay private if they can. But more broadly it signals that, despite the strong performance of Big Tech+chip companies this year, professional investors and retail stock buyers are very, very nervous about valuation.
That means you should be to!
All this to say that we thought we would use this moment to really reinforce our message from last week:
Be very, very careful about trying to buy into IPO hype. More often than not it is fancy circus and you will, quite literally, be holding the bill while insiders and the rich and powerful profit and exit.
Don't be left holding the bag for someone else's get rich quick scheme.
We would always strongly suggest remaining passively invested and only doing the bare minimum to customize that around your personal circumstances BUT whatever you do, don't chase IPO hype.
Evidently, that can be truly fatal to your savings.
If you are truly determined to own a small slice of a company we would counsel patience. Very quickly you may find that, as in Arm's case, the frenzy will dissipate as quickly as it appeared and suddenly the company won't really be worth what the experts were telling you just a few days ago.
The company's shares will then find their level and you can make a serious appraisal as to whether the business has merit and will change for the better going forward.
Speaking of whether a company is worth its share price, Arm isn't the only company trying to deserve its lofty valuation.
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