Getting in on a hot IPO could be a great opportunity for investors to buy shares in stellar growth stocks before market forces push the share price higher. But not every IPO pans out for shareholders. Sometimes the stock will sink below its initial pricing.

In that case, the stock could be a screaming buy, giving investors an opportunity to buy shares at an even better price. Or it could be a major warning signal for investors that the stock was overvalued at its IPO and the shares could have further to fall.

Two recent IPO stocks have fallen below their initial price: Instacart (CART -3.48%) and Arm Holdings (ARM -0.38%). But only one is worth buying at today's price, while the other still looks overvalued.

Instacart

Instacart is the leader in grocery delivery in the United States. It saw a boom in sales during the pandemic, and it's surprisingly been able to keep growing sales at a rapid pace in 2022 and 2023. That's despite increased competition from Uber (UBER -0.70%) and DoorDash (DASH -0.72%).

Sales accelerated from 24% growth in 2021 to 39% in 2022. Through the first six months of 2023, sales are up 31%.

Importantly, Instacart is starting to see the benefits of scale. Its gross margin expanded to 75% through the first six months of 2023 from less than 60% in 2020. That's helped push it into positive territory for operating income.

While online grocery sales continue to grow, they'll slow significantly over the next few years. More interestingly, analysts predict future growth will be fueled primarily by existing online grocery shoppers. That gives Instacart a huge advantage as an early mover in online grocery, as it's already built a substantial customer base. Likewise, it'll make it difficult for Uber and DoorDash to take market share.

Instacart, therefore, benefits from the network effect. And while Uber and DoorDash also have the network effect working in their favor, they're mostly operating in a separate domain -- ride-sharing and restaurant delivery. The network effect also benefits Instacart's advertising business, as the audience of increasingly frequent grocery purchasers makes for an enticing group for food and consumer packaged-goods companies to market to.

Shares of Instacart have fallen almost 20% below their $30 IPO price. What's more, shares trade at a massive discount to Uber or Dash. Instacart has an enterprise value less than 9 times analysts' 2024 EBITDA estimates. Uber and DoorDash trade at multiples of 24 and 26, respectively.

Arm Holdings

Arm is the company behind most chip designs in your smartphone or tablet. It's an increasingly popular alternative to x86 architecture like the chips Intel (INTC -0.69%) and AMD (AMD 0.10%) make for PCs. New Apple computers use Arm architecture, for example.

Arm's primary advantage is in its chip designs' power consumption. That makes them ideal for battery-powered devices such as smartphones, smartwatches, tablets, and laptops. But they may be underpowered for data centers. That said, the company is making inroads in that market as well.

Unlike many semiconductor designers, Arm doesn't sell chips itself. It licenses its designs to device manufacturers or other chipmakers. It then takes a royalty from the end product sales. Its average royalty is 1.7%. So, for example, if an iPhone sells for $999, and it has $100 worth of Arm chips inside, the chip designer collects $1.70.

This fabless business generates super-high gross margins. Arm generated a gross margin of 96% in fiscal 2023, ended in March. But with the research and development required to continue producing top-performing chip designs, its operating margin was about 24% over the past two years. That's lower than historic averages for Intel and roughly in line with AMD.

At its current share price, Arm Holdings trades at a premium to AMD and Intel. Arm's shares are trading for 38 times analysts' consensus earnings estimate for fiscal 2025 ending in March. Meanwhile, Intel stock can be had for just 21 times forward earnings, and AMD shares trade for 25 times forward earnings.

Investors looking to get in on IPO stocks right now would do best to avoid Arm and take a good look at adding Instacart's stock to their shopping carts.