Arm Holdings (ARM 2.05%) was one of the hottest initial public offerings (IPOs) of 2023. The semiconductor chip design company's stock price popped 25% on its first trading day, valuing it at almost $60 billion.
The company's massive and growing total addressable market (TAM) opportunity is powering that enthusiasm. Arm believes its opportunity includes all chips that contain a processor, like those found in smartphones, PCs, digital TVs, servers, vehicles, and networking equipment. The company estimated its TAM was $202.5 billion at the end of 2022 and will grow to about $246.5 billion by the end of 2025. The company sees catalysts like artificial intelligence (AI), automotive, cloud infrastructure, and the Internet of Things (IoT) driving its future growth and making it less dependent on the smartphone market it currently dominates.
How to buy
How to buy Arm stockPeople who want to buy Arm Holdings stock will need to do a few things before becoming a shareholder. Here's a step-by-step guide to investing in the semiconductor company.
- Step 1: Open a brokerage account: You'll have to open and fund a brokerage account before buying shares of any company. If you still need to open one, here are some of the best-rated brokers and trading platforms. Take your time to research the brokers to find the best one for you.
- Step 2: Figure out your budget: Before making your first trade, you'll need to determine a budget for how much money you want to invest. You'll then want to decide how to allocate that money. The Motley Fool's investing philosophy recommends building a diversified portfolio of 25 or more stocks you plan to hold for at least five years. You don't have to get there on the first day. For example, if you have $1,000 available to start investing, you might want to begin by allocating that money equally across at least 10 stocks and then grow from there.
- Step 3: Do your research: It's essential to thoroughly research a company before buying its shares. You should learn about how it makes money, its competitors, its balance sheet, and other factors to make sure you have a solid grasp on whether the company can grow value for its shareholders over the long term. Continue reading to learn more about some crucial factors to consider before investing in Arm Holdings stock.
- Step 4: Place an order: Once you've opened and funded a brokerage account, set your investing budget, and researched the stock, it's time to buy shares. The process is relatively straightforward. Go to your brokerage account's order page and fill out all the relevant information, including:
- The number of shares you want to buy or the amount you want to invest to purchase fractional shares.
- The stock ticker (ARM for Arm Holdings).
- Whether you want to place a limit order or a market order. The Motley Fool recommends using a market order since it guarantees you buy shares immediately at the market price.
Should you invest?
Should I invest in Arm?Doing your own research is a crucial part of the investment process. It could increase your conviction that the stock is a good investment. However, you also might learn something about the company that changes your mind about buying its stock.With this due diligence in mind, here are a few factors about Arm Holdings that could lead you to conclude that it's a good stock to buy.
- You understand Arm's business model, including that a large percentage of its revenue comes from royalties on legacy product designs.
- You believe Arm's revenue growth will reaccelerate as it taps into its large and growing TAM.
- You're comfortable investing in a recent IPO.
- You think Arm can expand beyond smartphones into data centers and the automotive sector.
- You're not worried that a competitor like Intel (INTC -0.35%) will begin taking some of its share of the smartphone market.
- You believe the company can reverse the decline in its profitability and start increasing earnings at a brisk pace.
- You think Arm will grow into its high valuation.
- Buying shares of Arm would help you build a more diversified portfolio by adding a semiconductor company.
- You're comfortable owning a stock that could be very volatile.
- You're not worried about Softbank's (OTC:SFTBY) large investment in the company.
- You don't need dividend income from your investment.
- You don't completely understand what Arm does or how it makes money.
- You're not sure if Arm's revenue growth will reaccelerate or if it will start growing its profits.
- You're worried Intel could eventually start stealing some of its leading smartphone market share.
- You think Arm trades at an unjustifiably high valuation.
- You already own several semiconductor and technology stocks.
- You're seeking stocks with less volatility than Arm.
- You prefer to wait and see if recent IPOs can deliver on their hype.
- You're concerned that Softbank might sell more shares, which could weigh on Arm's stock price.
- You're nearing or in retirement and need income-producing investments.
Is Arm profitable?Analyzing a company's profitability is an essential aspect of investment research. Profit growth has typically been the greatest driver of stock price performance over the long term. With that in mind, here's a closer look at Arm's profitability.
Arm had yet to report quarterly earnings as a publicly traded company as of late 2023. However, the company did provide investors with recent financial results in its IPO prospectus. The semiconductor company reported generating almost $2.7 billion in revenue in the fiscal year ending on March 31, 2023, and $524 million of net income from continuing operations.While Arm is solidly profitable, its earnings aren't growing. The company's revenue in fiscal 2023 was down slightly from the $2.7 billion it produced in 2022 (although that year's total was up 33% from the $2 billion generated in fiscal 2021). Meanwhile, Arm's net income from continuing operations was down significantly from the $676 million it earned in fiscal 2022 and slightly less than 2021's total of $544 million.The company must reaccelerate revenue growth and increase its profits to grow shareholder value over the longer term.
Does Arm pay a dividend?
Arm didn't pay dividends as of late 2023. The company completed its IPO earlier in the year and had not initiated a dividend. The chip designer noted in its IPO prospectus that it intends to retain any earnings from its business and doesn't currently plan to pay dividends.
ETFs with exposure to Arm
Many investors prefer to passively invest in stocks instead of actively investing by directly owning shares of specific companies. Exchange-traded funds (ETFs) are one of the most common passive investments.
However, as a fairly recent IPO, Arm Holdings had yet to make it into most ETFs as of late 2023. Because it's a U.K.-based company, it's not eligible for inclusion in the S&P 500 and is ineligible for the top S&P 500 ETFs. And while it trades on the Nasdaq Exchange, it likely won't be included in the Nasdaq-100 index or the top Nasdaq ETFs in 2023 because that index requires a company to trade publicly for at least three months after its IPO.
Meanwhile, many semiconductor ETFs can't hold shares initially. For example, the VanEck Semiconductor UCITS ETF (NYSEMKT:SMH) tracks an index that requires at least 10% of a company's float (i.e., total outstanding shares) to trade publicly for inclusion. After its IPO, only 9.4% of Arm Holdings float traded freely, with Softbank controlling most of the remaining shares. Meanwhile, other semiconductor ETFs track indexes requiring a three-month trading record, like the Nasdaq-100.Because of these requirements, investors will have to wait a little while to passively invest in Arm through an ETF.
Related investing topics
IPO Calendar 2023Learn about the top upcoming IPOs, why the IPO market was down in 2022, and what to expect for the upcoming IPO market in 2023.
What Is a Reverse Stock Split?When a company's board decides to reduce the outstanding share count, this is what you get.
Will Arm stock split?
Arm Holdings didn't have an upcoming stock split on the calendar as of late 2023. The company had only been public for a short time. It likely won't complete a stock split anytime soon. While shares initially popped 25% from its IPO price, they quickly gave back some of those gains. Shares would have to surge significantly above their IPO price before Arm would need to consider a stock split.
The bottom line on ArmArm believes there's a massive and growing market for the chips it designs, positioning the company to reaccelerate revenue growth and turn around its sagging profitability. This growth catalyst could enable the company to more than grow into its lofty post-IPO valuation.However, as a hot IPO, investors are paying a high premium for that growth potential, which might not develop. Potential investors need to understand the risks before buying shares of Arm.
Investing in Arm FAQs
Is ARM a good investment?
However, investors are paying a high price for that growth. Following its IPO, Arm traded at a price-to-earnings ratio of more than 110 times. It was about as expensive as Nvidia (NASDAQ: NVDA). That makes its valuation hard to justify, considering that Nvidia is growing exponentially while Arm's growth has stagnated. So, while Arm has lots of growth potential, it doesn't look like a good investment at its currently elevated valuation. If its revenue and earnings growth rates accelerate and its valuation comes down, it could be a more compelling opportunity.