SoftBank Lists Arm IPO In New York: What Does This Mean? And Is It A Buy?
After years of drama SoftBank is finally publicly listing its British semiconductor company, Arm Ltd. in New York.
This brings an end to a serious saga. There are a few implications of this sorry tale's conclusion that we will cover below but the biggest one is likely still the fact that this strategically vital company was ever sold to a foreign and self-interested investor.
Now SoftBank has arranged for this company to be publicly listed on the NASDAQ in what will almost certainly be the year's biggest initial public offering.
This is causing major excitement on Wall Street because initial public offerings (an "IPO") are big business and it has been a tough couple of years in that particular sector of the finance ecosystem.
Now, as the wags like to say, "we are so back."
Who cares?
You should!
There are, in fact, a few reasons that this IPO matters:
The first is that this is occurring in New York.
The second is that it is priced VERY high.
But third is that it is actually rather difficult to take advantage of Arm, one way or another.
We will deal with each in turn but keep in mind that it is really the 3rd point that is both under-appreciated by many investors and also one that we haven't really discussed before.
If you are a new subscriber and interested in the back story we have written twice about the drama surrounding the semiconductor company here and here.
Let us get to our reasons this IPO should be on your radar:
First, this is all happening here in NY.
This is the location where they will almost certainly get the best price and it is very, very difficult to argue that someone selling something shouldn't act in their own self interest.
You could argue - and many British politicians and bankers no doubt did - that the location shouldn't matter overly to Arm itself. Money is money after all. And whether you raise it in London or New York is somewhat irrelevant. Both are large and sophisticated markets with deep reservoirs of investors and experience in the IPO game.
However, it isn't completely true. New York and the American investing ecosystem will also likely provide a higher share price and deeper capital markets - which is what they will likely get in New York - is better for SoftBank of course but it is also better for Arm Ltd. the company as well.
But it matters extremely to the UK and especially their stock market and all their investors - active or passive. That is because they are losing out on the chance of owning a piece of a very valuable company.
The US has many large and valuable tech hardware companies. We have talked about Nvidia many times and it is hardly alone. The UK has really just one and though it is still based in Cambridge, UK it has been owned by Tokyo-based SoftBank and now it will be listed on an American exchange.
Just you watch, once this IPO is over the arguments to move their headquarters to the US will also begin. There is a lesson here and it is simply incredible that the British government ever forgot it:
The age of globalization is over, the age of strategic self-interest has begun.
On the second point, while listing in New York may be a great idea for Arm, we are less sure that buying Arm shares in New York is a good idea for investors of any nationality.
Why?
Because SoftBank is being greedy.
They are trying to set the IPO price at just over $50 billion dollars.
That is a lot. For context, it is nearly 100 times (!) last year's income. That means each share is priced on an expectation that they will make at least 100x Arm's 2023 sales. We aren't going to get into the real details of their business prospects but that is nearly as expensive as Nvidia today and yet, we can't but notice, they are not exactly Nvidia.
How so?
Well for one thing there is the uncomfortable fact that, by the company's own admission, they are not doing that well.
In fact, the company isn't really growing very much which is sort of hard to square with pricing it as if it it the ultimate growth stock. Now it is very true that this could always change. Arm dominates the market for smartphone chip designs and make a ton of money as a result of that fact but the sad truth is the global smart phone market is very stagnant right now.
China, Germany, Great Briton, much of easterm Europe, many developing countries are all struggling with low growth and high inflation and people are understandably putting off dropping their hard earned cash on a new smartphone.
This is also a problem when you already dominate this market. There is no more market share to capture....
Arm itself admits this fact in their IPO prospectus where it discusses the risks to its business and states that its dominance in the smartphone market "may limit opportunities for future growth."
Oh.
Their reliance on the growth of the smartphone market in China is also troubling. As Apple has discovered this week, China is looking to replace US hardware wherever possible. Decoupling is real and there is no reason Arm will avoid Apple's fate.
Arm's other business silos have troubles as well. The semiconductor company struggle to achieve the scale in data processors like their huge rival Intel and have missed much of the cloud and "Generative AI" hype that has fueled Nvidia's meteoric rise.
So, Arm is still a great business but we just are not sure they are a $48-52 billion dollar market cap business. Already at this price this would be the 3rd largest IPO ever on the Nasdaq exchange behind only Facebook and Rivian. Both those IPOs disappointed as well.....
SoftBank and their bankers have priced the company as if Arm Ltd. is another Nvidia and, well, that company has done this well precisely because there is only one Nvidia. That is the whole point.
The third and last point is the least discussed and therefore perhaps the most important.
If you are a passive investor, you will likely not own Arm's shares.
Why?!?
Because it is not a US company.
It is slightly more complicated than pure nationality but in essence, a foreign company can't be included in the S&P 500. This is despite the fact that, if it IPOs at roughly the level expected, it would be immediately larger than around 200 of the S&P 500's companies.
This is a pretty odd situation!
Arm's foreign status makes it very difficult to be included in most - not all - passive financial products for US stocks which are based on the S&P 500 index.
That isn't all either.
It also can't be included in various MSCI indices either. MSCI is a major index provider and so if you want to buy US or German or British equities or what have you you often end up buying "international" or "global" equities in your retirement savings account.
It won't be in the MSCI UK and it won't be in the MSCI US indices.
The industry term for this is that Arm will be "orphaned." Though it will be listed on a major exchange (the Nasdaq) and is a large and successful company it doesn't really have a home.
It is true that if you own a Nasdaq-based index then it will be included and the same goes for many (though not all) popular Nasdaq-based ETFs. If you are interested please check your index provider or ETF very, very carefully.
So, what about the most important question of all? Should you buy?
We think not.
The latest news is that the IPO is "six times" oversubscribed which means that there are six times the commitments to buy shares than there are shares available. That sounds like a lot and it is a sign of serious interest but in reality, it is all part of the game the financial industry plays.
Bankers love to throw around numbers like that but if they didn't have a very significant oversubscribed book they would have to pull the IPO rather than risk the damage that a failed listing would cause.
So, surprise, surprise, SoftBank and the coterie of very smart bankers looking to making a killing from the golden Arm goose are doing the smart things to maximize their profit but the difficulty is, it is very very hard for regular retail investor to take advantage of any of this.
In fact this process is almost predicated on rewarding insiders and those with the money or influence to achieve an an inside track and ripping off everybody else.
Now all this may be true but the stock will likely pop on the day of, driven by hype and interest and algorithms and professional traders but then, by the time you have been allocated any shares, it will be a rich price indeed.
So, before buying ask yourself: am I an insider? Do I have an edge here?
You might end up owning a worse semiconductor business at a higher, more expensive price than Nvidia at these levels which raises the salient question of....
Why not just buy Nvidia!??
After all, at least that company has a monopoly on a slice of the semiconductor business that is growing and growing strongly.
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?
Hopefully you will be cautiously waiting to buy Arm at a better price or, better yet, wait for the smartphone market to show signs of life as well.
But we did think that we should point out that our normal advice: "don't worry, you likely already own it" actually isn't true this time. Regardless of what happens most American passive will miss the Arm train. That may not be the end of the world but it is also noteworthy and interesting in the sense that Arm isn't alone and more and more foreign companies are listing in the US because of deeper capital markets, a stronger economy and more active investors.
Even just recently the list includes most notably: Linde (Germany's biggest publicly traded company), VinFast (a Vietnamese car manufacturer), BionTech (the fabulous German maker of the Covid vaccine), Spotify (the Swedish online music streaming firm) and many others.
More and more of the world's best companies are coming to the US but the irony is that many of the smartest American investors - those passively invested in easy index products - are not benefiting whatsoever. This is a very rare instance of a real and frankly unstated downside to passive investing, at least at present.
Listing in the US may still be great deal for these "orphan" global companies but it is weird to keep great and US-listed companies out from the biggest US financial indices and therefore most passive products. There isn't much point in hosting all these companies if most of your investors struggle to take advantage of their excellence and wealth creation.
It may be time for a rule change....
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