I can't wait to get my hands on one tech initial public offering (IPO) this month. This giant has been tucked away under a fairly obscure parent company on the over-the-counter market for way too long.
Wall Street isn't exactly bustling with fresh IPOs right now. The American stock exchanges saw 105 market entries in the first eight months of 2023.
There were three single months in the record-breaking year 2021 that exceeded that grand total. Accounting giant Ernst & Young doesn't see any signs of increased IPO activity over the next quarter, given the unstable economy and moderate market interest in unproven growth stories.
But the IPO flow hasn't dried up entirely. I'm keeping a close eye on one upcoming market entry, in particular, ready to scoop up some shares if the pricing is right.
I'm talking about semiconductor giant Arm Holdings, of course. The company, whose microprocessor technology is found in nearly every smartphone, tablet, smart TV, and modern car, is entering the public market again. Its seven-year stint as a division of Japanese telecom giant SoftBank Group(OTC: SFTB.Y) is ending, giving you and me another chance to invest in this market-defining technology guru.
Here's why I'm so excited about Arm's IPO.
Recap of recent events
You might recall that chip designer Nvidia(NASDAQ: NVDA) tried to acquire Arm in recent years. The $40 billion buyout would have been a game changer, especially since Nvidia could have gained control over Arm's processor platform just ahead of ChatGPT lighting a fire under the artificial intelligence (AI) market.
Nvidia CEO and founder Jensen Huang dropped this golden nugget in the deal announcement three years ago:
In the years ahead, trillions of computers running AI will create a new internet-of-things that is thousands of times larger than today's internet-of-people. Our combination will create a company fabulously positioned for the age of AI.
With the benefit of 20/20 hindsight, these words sound downright prophetic in 2023.
But regulators around the world dragged out the merger process, and SoftBank scuttled the deal in February 2022. With Arm under its arm, Nvidia would be an unstoppable force with excessive control over the global semiconductor industry. So SoftBank went back to the lab again and started planning an IPO, instead.
So here we are. Arm filed a confidential draft of its F-1 registration statement in April, targeting an IPO in the fall of 2023. The company is currently holding an IPO roadshow to whip up investor interest and share important information about the event. And the confidential draft is now a public filing.
This IPO is a big deal
Arm's processor architectures are found in pretty much every mobile, embedded, and industrial central processor unit (CPU) today. Arm's Cortex solutions are the basis for tons of low-power and mobile chips such as the Qualcomm Snapdragon series or the Apple A16 (for iPhones) and M2 (in iPads and Macbooks).
Now, the company is also setting its sights on the data center and edge computing. The Arm Neoverse platform is a heavily tweaked version of Cortex, shifting its focus from low-power operations to maximum performance. It's found in high-performance computing systems, high-speed networking equipment, and edge computing solutions.
In other words, whatever you're doing in the computing space, Arm's chip-designing customers probably have a processor for you.
The immense popularity of the Cortex and Neoverse architectures puts Arm in a unique market position. Investing in Arm is a very direct bet on the computing industry as a whole, without picking specific winners among the many chip-building alternatives. And like Jensen Huang said in the summer of 2020, this industry is on the verge of explosive growth due to the rapid adoption of AI technologies.
Arm's IPO could be affordable, too
The IPO filing didn't specify a date or mention a projected share price at launch. However, insider reports point to a September 14 IPO, and other bits of paperwork suggest a reasonable initial price.
Earlier, SoftBank hoped to collect as much as $10 billion in cash proceeds from selling 10% of Arm's shares. Now, the company is settling for roughly $6 billion, instead, suggesting a total market value of approximately $60 billion on day one.
I think that's a very reasonable price of entry for an exciting leader in the semiconductor sector. The modest and fading IPO price looks especially helpful in contrast to the skyrocketing share prices of AI-chip specialists Nvidia and Advanced Micro Devices. These two AI stocks have gained 232% and 70% in 2023, respectively.
That investor frenzy should also leak into Arm's research-focused corner of the semiconductor space. Just give the market time to digest Arm's unique leadership as a stand-alone business.
Mr. Market doesn't always act as expected, of course. I'm not diving headlong into the Arm IPO but keeping a sober eye on the public offering. If Arm's market cap soars to $100 billion right away, I'll stay away until it cools down. On the other hand, I just might pick up a few shares if the stock stays in the $50 billion to $60 billion range.
That's unusual, because I generally don't recommend getting into unpredictable IPO stocks -- but Arm is an exceptional case with decades of business experience and a massive market footprint. That's why its IPO deserves special treatment.
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Anders Bylund has positions in Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Nvidia, and Qualcomm. The Motley Fool has a disclosure policy.
