Arm Debut Gathers Retail Investors' Love: ETFs in Focus

British chipmaker Arm Holdings Plc made a strong debut on Nasdaq under the symbol ARM on Thursday. The stock soared as much as 21% on the first day, pushing the market cap to more than $65 billion.

The chip designer, which is owned by SoftBank Group Corp., sold 95.5 million American depositary shares for $51 a piece, raising $4.87 billion in its initial public offering that valued the company at more than $54.5 billion. This is the most high-profile IPO that the Nasdaq has seen since 2021’s IPO boom, which cycled into a bust in 2022, and is the biggest U.S. initial public offering of the year.

Buying Binge Debut

Arm Holdings sizzled with its debut drawing significant attention from retail traders. Data from Fidelity’s trading platform revealed that the chip designer led in buy orders on Thursday, accumulating over 20,000 purchase requests. This demand overshadowed popular retail choices such as Tesla TSLA and Nvidia NVDA. Fidelity’s statistics reflect the aggregate order count placed by its self-directed retail client base.

According to Yahoo Finance data, Arm was the most-traded stock on Thursday, with 108 million shares trading hands. Retail trader platform Stocktwits also highlighted Arm’s ticker as trending, further indicating the company’s growing appeal among individual investors.

This increased retail appetite serves as a testament to the enthusiasm of smaller traders eager to invest in promising contenders within the booming AI sector. After a lull in the IPO market over the past two years, Arm’s successful debut signals potential for more tech-based offerings in the near future.

Arm: A Good Bet?

Arm is defining the future of computing and is the industry leader in CPUs. It architects, develops and licenses high-performance, low-cost, and energy-efficient CPU products and related technology, on which many of the world’s leading semiconductor companies and OEMs rely to develop their products. Arm CPUs run the vast majority of the world’s software, including operating systems and applications for smartphones, tablets and personal computers, data centers and networking equipment, and vehicles, as well as embedded operating systems in devices such as smartwatches, thermostats, drones and industrial robotics.

The chipmaker has built a highly profitable business with dominance in the mobile device market. It has more than 99% of the smartphone market but lags in the fast-growing cloud computing market, with just 7% share. Arm’s revenues dipped slightly to $2.68 billion in its fiscal 2023 ended Mar 31 amid weak smartphone sales.

The British chipmaker is poised to benefit from the demand for artificial intelligence chips and generative AI. This industry shift has given Nvidia a market value of more than $1.1 trillion. In its IPO filing, Arm said that it has room to grow beyond just smartphones and wants to design more chips for data centers and AI applications. It expects the total market for chip designs to be worth about $250 billion by 2025.

Arm currently gets 63% of its revenues from royalties and 37% from licensing. Royalties enable Arm to get a payment per chip sold. Licensing involves giving customers access to its portfolio of intellectual property for developing Arm-based processors.

However, the current valuation of the British chip company seems too high. At a $60 billion valuation, Arm’s price-to-earnings multiple is over 110 based on the most recent fiscal year profit. This is higher than that of Nvidia, which is trading at 108 times earnings. Additionally, Arm’s large exposure to China, which comprises roughly 25% of its revenues, is another headwind. China’s economy is facing increased risks of a broader economic slowdown and lowering demand amid the economic war with the United States escalating to new levels, especially in the chip industry.

How to Bet?

The successful market debut of ARM could pave its entry into a handful of ETFs due to the inclusion rules. Since Arm is not a U.S. company, it will be excluded from the S&P indexes. Secondly, ETFs generally require a company float of 10% or more of the shares to be eligible for inclusion. And Arm appears to have a float of roughly 9.3% of the company, according to Renaissance Capital.

Renaissance IPO ETF (IPO)

Renaissance IPO ETF provides exposure to the largest and most-liquid newly listed companies by tracking the Renaissance IPO Index. New companies find entry at the end of the quarter when the index rebalances. The fund currently holds 76 stocks in its basket, with double-digit exposure in the top two firms. Technology is the top sector, accounting for 52.8% share, while consumer discretionary and financials round off the next two spots with double-digit allocations each.

Renaissance IPO ETF has amassed $196 million in its asset base while trading in a light volume of about 86,000 shares, probably implying additional cost beyond the expense ratio of 0.60%.

First Trust US Equity Opportunities ETF (FPX)

First Trust US Equity Opportunities ETF focuses on the largest, best-performing and most-liquid U.S. IPOs, and follows the IPOX-100 U.S. Index. New companies seek inclusion on a fast-entry basis after the close on the sixth day of trading. First Trust US Equity Opportunities ETF holds 103 securities in its basket, with the largest allocation going to the top five firms. The ETF is widely spread across sectors, with industrials, information technology, consumer discretionary and healthcare accounting for double-digit exposure each.

First Trust US Equity Opportunities ETF has $766.2 million in AUM and trades in a volume of about 46,000 shares per day. It charges 60 bps in fees a year.

Invesco QQQ (QQQ)

Invesco QQQ provides exposure to the 101 largest domestic and international non-financial companies listed on the Nasdaq by tracking the Nasdaq 100 Index. New companies seek entry at the end of the quarter when the index rebalances. Invesco QQQ is one of the largest and most popular ETFs in the large-cap space, with an AUM of $206.2 billion and an average daily volume of 46 million shares. It charges investors 20 bps in annual fees and has a Zacks ETF Rank #2 (Buy).

Invesco NASDAQ 100 ETF (QQQM)

Invesco NASDAQ 100 ETF is identical to QQQ, tracking the NASDAQ-100 Index, but comes with lower annual fees of 15 bps. It holds 102 securities in its basket. NASDAQ 100 ETF has accumulated $14.6 billion in its asset base and trades in an average daily volume of 986,000 shares. It has a Zacks ETF Rank #2.
NVIDIA Corporation (NVDA): Free Stock Analysis Report

ARM Holdings PLC (ARM): Free Stock Analysis Report

Tesla, Inc. (TSLA): Free Stock Analysis Report

Invesco QQQ (QQQ): ETF Research Reports

Renaissance IPO ETF (IPO): ETF Research Reports

First Trust US Equity Opportunities ETF (FPX): ETF Research Reports

Invesco NASDAQ 100 ETF (QQQM): ETF Research Reports

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