We recently compiled a list of the 12 Best New Stocks to Buy According to Hedge Funds. In this article, we are going to take a look at where Arm Holdings plc (NASDAQ:ARM) stands against the other new stocks.
US public markets continue to brace themselves for a 2025 resurgence, which should be led by interest rate cuts, pent-up investor demand, and a growing backlog of IPO expectations. As per PwC, there are over 700 unicorns in the private market as a result of the subdued IPO activity over the previous 3 years.
Many IPO candidates, which also include some unicorns, have utilized this time to improve and strengthen their finances and transition to sustainable growth models. Apart from this, pressure continues to mount on private equity fund managers to return capital after an elongated exit dry spell, reported PwC.
IPO Market Analysis – A Quick Recap
As per PwC, the traditional IPO market saw its gradual comeback in 2024, with proceeds garnered ~50% higher than in 2023 and ~4x the amount raised in 2022. The IPO activity was broad-based, with strong participation from sectors such as technology, life sciences, consumer markets, and financial services. Stock prices of this year’s traditional IPOs appreciated ~29%, surpassing the S&P 500 index’s return of ~27% on a YTD basis (ended 26th December 2024). This highlights the strength, investor interest, and traction in new offerings.
PwC went on to add that IPO activity saw a strong increase in 2024, with 61 traditional IPOs garnering more than $26.4 billion YTD, which was in line with the combined total number of IPOs in 2022 and 2023, which witnessed 28 and 35 IPOs, respectively. Despite this improvement, IPO activity remained short of early anticipations and historical levels of activity. This is because several IPO candidates decided to stay on the sidelines as they waited for a clearer economic picture after the U.S. presidential elections.
READ ALSO: 7 Best Stocks to Buy For Long-Term and 8 Cheap Jim Cramer Stocks to Invest In.
What Lies Ahead?
The continued rate cuts and a stable policy environment should boost investor confidence, which can help create more favorable market conditions. PwC gave a 60% probability of a “soft landing” scenario and a 20% probability of an optimistic “no landing.” Notably, both of these scenarios offer a supportive environment for IPOs.
As per Lynn Martin, president of the NYSE, 2025 year will be an active one for the IPOs. Also, Reuters highlighted that reduced interest rates and inflation slowdown should act as catalysts for new listings. Furthermore, the expected easing of regulations under the new Administration paints a positive picture of the deal activity in capital markets. Bloomberg reported that, as per Goldman Sachs, the number of IPOs in the tech sector is expected to more than double next year.
Our Methodology
To list the 12 Best New Stocks to Buy According to Hedge Funds, we used a screener to shortlist the companies that went public in the past 2 years. Next, we narrowed the list to the ones having high hedge fund positioning. Finally, the stocks were ranked in ascending order of their hedge fund sentiment, as of Q3 2024.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A robotic arm holding a semiconductor chip, emphasizing the precision and quality of the company’s production equipment.
Arm Holdings plc (NASDAQ:ARM)
Number of Hedge Fund Holders: 38
Arm Holdings plc (NASDAQ:ARM) is a British semiconductor and software design company. It was listed on NASDAQ on 14th September 2023.
Wall Street believes that Arm Holdings plc (NASDAQ:ARM)’s latest v9 chip architecture continues to gain traction. This transition is significant because v9-based chips command increased royalty rates, potentially doubling or even quadrupling the fees the company receives per chip.
The transition should act as a revenue driver as it affects Arm Holdings plc (NASDAQ:ARM)’s core mobile market, where it has a strong market position. As and when smartphone manufacturers upgrade their devices to incorporate v9-based processors, Arm Holdings plc (NASDAQ:ARM) will benefit from increased royalty rates on a massive installed base. Furthermore, the enhanced capabilities of v9 architecture, which includes improved AI performance and security features, can ramp up adoption in other markets like automotive and IoT, further driving royalty growth.
The compounding effect of increased royalty rates and expanding market applications should support topline and bottom-line growth. Arm Holdings plc (NASDAQ:ARM)’s energy-efficient chip designs are well-suited for an increased demand for on-device AI processing in smartphones, PCs, and other edge devices. The on-device AI market size was valued at US$17 billion in 2023 and should reach US$114.36 billion by 2031, as per Verified Market Research. Arm Holdings plc (NASDAQ:ARM) is well-positioned to capture a substantial portion of this expanding market.
Overall ARM ranks 7th on our list of the best new stocks to buy according to hedge funds. While we acknowledge the potential of ARM as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than ARM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article is originally published at Insider Monkey.