Retail investors should approach Arm’s blockbuster IPO with caution: analysis

Retail traders should approach Arm Holdings’ initial public offering (IPO) with caution as individual investors often lose money when they invest in hot listings. Arm, owned by SoftBank Group, is primarily targeting institutional investors for its $5 billion IPO in New York, leaving retail investors to potentially buy shares at higher prices once they begin trading. An analysis shows that the top 10 U.S. IPOs over the past four years have an average return of -47% from their first day of trading. Only two of these stocks, Snowflake and Airbnb, are currently up from their IPO prices. The volatility and risk associated with buying into blockbuster IPOs highlight the importance of low-cost index funds for retail investors.

The IPO market has slowed down in recent years due to economic uncertainty and volatility. Arm’s IPO and an upcoming listing from Instacart are expected to revitalize the lackluster IPO market. Grocery delivery service Instacart is offering some retail investors the opportunity to participate in its IPO through underwriter fintech company SoFi. While Arm is not widely recognized by consumers, its IPO is likely to attract retail interest, similar to Nvidia, which has been a retail favorite this year.

Retail participation in U.S. stocks has surged in 2021, driven by low interest rates, zero-cost trading apps, and social media hype around meme stocks such as GameStop. However, retail investors have become more cautious following last year’s stock market sell-off. While some retail investors will try to get in on Arm’s IPO, it is not expected to reach the levels seen in 2021 IPOs. Arm, SoFi, and Instacart declined to comment on the matter.

Arm is seeking a valuation of more than $50 billion, potentially making it the most valuable company to list in New York since Rivian Automotive’s debut in 2021. However, Rivian’s market value has plummeted by over $60 billion since its listing. Other major IPOs, such as DoorDash, have also experienced significant declines in stock prices. The overall performance of IPOs in recent years has been poor, primarily due to market uncertainties and rising interest rates. Studies have consistently shown that IPOs offer disappointing returns.

In the past four years, over 260 IPOs with market values above $1 billion have experienced an average decline of 29% from their offering prices and a 49% decline from their initial trading highs. One exception is chipmaker GlobalFoundries, which has gained 23% since its 2021 IPO. Overall, IPOs have struggled to perform well, emphasizing the importance of cautious investment strategies.

Hannah Lang, a reporter who covers financial technology and cryptocurrency, including industry businesses and policy developments, emphasizes the risks associated with IPOs and the potential benefits of low-cost index funds for retail investors. She previously worked in bank regulation and the Federal Reserve and holds a degree from the University of Maryland.