Why I'm Cautious About Investing in ARM's IPO

The much-anticipated IPO of chip design firm Arm has arrived.

Illustration shows Arm Ltd logo

The excitement around $Arm Holdings(ARM)$'s upcoming initial public offering (IPO) is undeniable, but I find myself taking a more cautious stance. While the company's potential is undeniable, history has shown that many major IPOs struggle to outperform the S&P 500 in the long run. The reason for my hesitation in discussing this until now, despite the growing excitement, is that I believe entering this stock immediately following its IPO might be premature.

The top 10 U.S. IPOs from the past four years have averaged a 47% drop from their first-day closing prices, per LSEG data, with investors buying at intra-day peaks seeing a 53% loss on average.

It's a well-documented fact that the majority of IPOs tend to underperform when compared to established market benchmarks like the S&P 500. Even though ARM has the potential to soar, history suggests that the odds may not be in favor of immediate success.

Even if ARM eventually becomes a great long-term investment, I anticipate that its price will experience significant fluctuations before reaching the heights it may achieve in the future. These fluctuations could persist for years.

Illustration of my bold prediction

My bold prediction is that ARM's share price will likely follow a pattern seen in many IPOs. Initially, there might be a surge in demand, causing the price to rise. This momentum rise could be followed by a temporary dip below the IPO price only to surge higher before falling back as the market settles and early investors take profits.

The dip below the IPO price, when it occurs, might tempt retail investors to enter the market, believing that the stock has found stability. This could be a classic bull trap, where the price rises briefly before falling to all-time lows.

My strategy involves waiting for what I believe is a more opportune time to buy. This would be when the stock retests its all-time low or shows signs of stabilizing after a period of turbulence. This phase might take months or even years to materialize.

Instead of rushing into the IPO, I prefer to wait and observe ARM's performance through a few quarterly financial reports. This allows me to gather more information about the company's growth trajectory, profitability, and stability.

In conclusion, while ARM is undoubtedly a promising company with substantial potential, I believe that patience is key when it comes to investing in its IPO. History has shown that the stock market can be unpredictable, and taking a cautious approach may yield better long-term results. I'll be watching closely, but I'm not rushing to invest in ARM until I see signs of a true bottom and gather more insights into the company's financial performance.

Disclaimer: The information provided in this post is for informational purposes only and should not be considered as financial advice. This post reflects my personal opinions and should not be considered as financial advice. Investment is subject to significant risk, including the potential loss of capital. Always conduct thorough research before making any investment decisions.

Do you agree with my analysis? Feel free to voice out your opinion and criticism in the comments below.

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