For one day, Sacks Parente Golf (SPGC) was a dream initial public offering (“IPO”)…
The company combines many folks’ interests in golf and technology. It takes an innovative approach to making lightweight golf-club shafts, grips, and other products.
Sacks Parente Golf went public on August 15 at $4 per share. The stock closed that day at $28.97 per share. That’s a 624% gain in one day.
But for investors, the dream IPO soon turned into a nightmare…
The stock collapsed all the way back down to $4.47 per share the next day. And it now trades for about $2.80 per share. That’s around 30% lower than its IPO price.
Now, Sacks Parente Golf’s extreme moves are unusual. But the basic story is familiar…
In an April 2021 study, Nasdaq found that “almost two-thirds of IPOs are underperforming the market” after three years. And 64% of those IPOs trail the market by more than 10%.
We need to keep those statistics in mind today.
You see, we’ll soon hear a lot about a gigantic tech-related IPO. The mainstream media is already describing it as a potential way to play the artificial-intelligence (“AI”) boom.
But it’s not that simple…
Specifically, we’re talking about United Kingdom-based Arm.
The company is known for producing semiconductor central processing units (“CPUs”). Its products combine high performance with very low power consumption.
As consumers, we take that combination for granted today. But that’s only because of Arm’s extreme success…
You see, more than 99% of the world’s smartphones use Arm’s CPU design. And these CPUs are in many other products, as well. About 70% of the world’s population uses products that run on Arm’s CPUs.
In short, Arm isn’t like many early-stage companies that go public through an IPO. It has been around since 1990.
And in this case, the proceeds from Arm’s IPO won’t go to the company itself. Instead, they’ll go to SoftBank, which acquired Arm in 2016. The Japanese conglomerate now wants to sell part of its stake.
SoftBank is reportedly looking for a $60 billion to $70 billion IPO valuation for Arm. That would put its valuation between 30 to 35 times the company’s sales for the 12 months that ended in March 2022.
For comparison, the trailing-12-months price-to-sales ratio for AI leader Nvidia (NVDA) is about 35.
In fact, Nvidia previously tried to acquire Arm for $66 billion. But regulatory opposition forced the leading chipmaker to scrap the deal in February 2022.
Arm isn’t a clear-cut, AI-focused play yet. In the past, though, Nvidia CEO Jensen Huang noted that the company is well positioned to expand the reach of its CPUs “beyond client computing to supercomputing, cloud, AI, and robotics.”
So it’s reasonable to connect Arm to AI. And it will likely go public with an Nvidia-like valuation.
But we can’t assume this valuation will work for IPO buyers…
For one, the deal with Nvidia fell through. So Arm now needs to work on its own to develop enough capability to run AI workloads. It can’t rely on Nvidia’s expertise in that area.
Arm’s existing businesses are also in the spotlight. And they face big challenges today…
Demand for smartphones and tablets is slowing. Arm might try to squeeze more out of that business by charging device makers for its designs. (It currently just charges chipmakers.)
But that plan might not work…
Device makers like Apple (AAPL) have started making their own “cores.” And if that trend continues, it will reduce the value of the designs-plus-cores that Arm supplies to its customers.
In this case, we’re operating in the dark without our trusted guide…
The Power Gauge needs about a year’s worth of market data to develop a ranking for Arm. And not having our system hampers our ability to answer some of these big questions.
For one thing, we won’t have its Earnings category to help us assess Arm’s progress.
Meanwhile, SoftBank will try to support Arm’s stock price. It’s using 28 underwriters. And it hopes to recruit deep-pocketed anchor investors that are less inclined to sell – like Amazon (AMZN).
But the Power Gauge’s Technicals and Experts categories won’t be there to help us evaluate this plan’s success. Sure, we can watch the stock ourselves. But I trust our system.
Meanwhile, the Power Gauge is already giving us an AI-related opportunity…
Nvidia receives a “bullish” rating today. And it’s beating the broad market in a big way.
The Power Gauge will eventually give us its take on Arm. The stock could wind up with a favorable ranking like Nvidia. If so, we’ll have plenty of opportunities to buy shares.
For now, it’s best to stay patient and watch from the sidelines.
Good investing,
Marc Gerstein
