Thursday Sep 14 2023 14:28
11 min
Shares of Arm Holdings, backed by Masayoshi Son’s SoftBank, are set to start trading on Thursday, September 15. Arm revealed on Wednesday that it had priced its shares at $51, at the upper end of the anticipated range of $47 to $51. This valuation placed the chip design company at a market capitalization of over $54 billion, making it the largest initial public offering since electric truckmaker Rivian's (RIVN) debut in 2021.
Based in the United Kingdom, Arm specializes in designing software for computer chips used in a wide range of devices, including cellphones, tablets, wearable technology, and automobiles. It licenses these designs to companies that manufacture and utilize the chips. In 2016, Japanese investment company SoftBank took the company private in a deal valued at $32 billion. Following the IPO, SoftBank will retain ownership of 90.6% of the company's shares.
According to Arm's own estimates, its chip architecture was present in 99% of the world's smartphones in 2022. The company reported that over 30 billion Arm chips were shipped in the fiscal year ending in March 2023, with more than 250 billion chips shipped since the firm's inception.
The company counts several major tech giants among its potential investors and technology users, including Intel (INTC), Nvidia (NVDA), Apple (AAPL), Alphabet (GOOG), Samsung (SMSN), and Advanced Micro Devices (AMD), among others.
A proposed sale of the firm to Nvidia (NVDA) in 2022 was abandoned due to regulatory concerns.
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Founded in 1990 through a joint venture between Apple, VLSI Technology, and Acorn Computer, a UK-based educational computing company, Arm is primarily involved in the design of circuits for chips —although it doesn't engage in chip manufacturing.
Based in the UK’s Cambridge, Arm provides two primary services. Firstly, it grants licenses for fundamental chip design standards that dictate how software controls chips. These protocols are essential for chips to process calculations as required by apps, ensuring proper software functionality. Secondly, Arm licenses designs for critical chip components — essentially miniature digital processors within the chips. This service saves chip designers the time and costs associated with developing these components from scratch.
In its early years, Arm focused on serving the emerging mobile phone industry, concentrating on providing circuit blueprints for devices that operated on batteries and required minimal power consumption. Over time, Arm has become ubiquitous in the smartphone market, boasting a market share estimated at over 99%. As it transitions into a publicly traded company, Arm is eyeing expansion into the realm of chips for personal computers, servers, and other devices.
Arm's major clientele includes companies like Qualcomm (QCOM), known for designing processors at the core of mobile phones. Apple has also emerged as a significant customer in recent years as the Cupertino-based company shifted its focus to designing its own chips, including those for its computer lineup. Amazon (AMZN) also employs self-designed Arm-based chips in its data centers.
However, Arm faces competition, both from newcomers employing a rival open-source chip standard called RISC-V and from major tech firms that are increasingly incorporating their circuitry into chips, sometimes replacing Arm's designs. Investors in the company are placing their bets on the assumption that Arm's designs will remain widely used as chip demand continues to grow, and that its competitors won't be able to gain a competitive advantage.
In its most recent fiscal year ending in March, Arm reported revenue of $2.68 billion and a profit of $524 million.
While Arm has experienced consistent sales growth in recent years, it has encountered a decline in smartphone shipments in more recent times. Sales dipped by approximately 2.5% in its most recent quarter, which ended in June, to reach $675 million.
Arm and its underwriters, led by top U.S. investment bank Goldman Sachs (GS), set the IPO share price at $51 on Wednesday, concluding a week-long roadshow to investors. Its American depositary shares are slated to commence trading on the Nasdaq (NDAQ) under the ticker symbol ARM on Thursday.
The UK-headquartered company filed its application for a U.S. listing confidentially earlier this year, having previously declared its intention to go public in New York rather than in London, dealing a blow to the London Stock Exchange.
Arm’s stated price falls at the upper end of the company's targeted range of $47 to $51 per share, resulting in a valuation of $54.5 billion. The valuation was notably lower than the $64 billion at which Arm's owner, SoftBank, recently appraised the company when it acquired a stake from its Vision Fund.
Arm stock price forecasts: Chip designer looks to ride AI wave heading into IPO
While most firms are waiting until the stock hits the market to make their predictions, NewStreet Research analyst Pierre Ferragy wasted no time to see what happens with the IPO. On Wednesday, Ferragu picked up coverage of Arm shares with a Buy rating and a $59 rarget price, as per Barron’s.
“Arm’s fundamentals have not changed in the last seven years: The company rides growth in semiconductor content across all end markets, driving up adoption of its IP,” Ferragu wrote.
Ferragu cited a “high-quality financial model,” a well-timed IPO and an “attractive” valuation as three primary reasons for being bullish on the stock. “The IPO happens at a low in the smartphone market, as penetration accelerates in networking, cloud, and autos, and in the early days of the migration to the v9 architecture,” Ferragu wrote, referring to the company’s latest chip design.
Market.com Chief Market Analyst Neil Wilson was more reserved, saying the offering came at an “interesting” time for the market:
Javier Correonero, an equity analyst at Morningstar, said the stock looks overvalued heading into the Arm IPO:
With a market valuation exceeding $54 billion, Correonero anticipates that Arm's stock will command a valuation approximately 20 times its revenue. This would make the stock "quite expensive" when contrasted with its competitors, some of which are experiencing growth rates more than three times that of Arm but are trading at lower multiples — typically around 12 to 15 times their sales. Nvidia is also trading at a 20-times multiple akin to Arm's, but industry experts project the former to achieve a growth rate of approximately 100% this year. Nvidia also boasts a significantly broader variety of business operations compared to Arm.
While analysts are split in their opinions of the Arm stock price and valuation, Masayoshi Son will be able to lean on the newly listed firm as a source of financing for SoftBank.
SoftBank, known for its recent shift towards a "defensive" strategy, reduced its investment in the Chinese e-commerce powerhouse Alibaba (BABA). This move is significant, considering that Son was one of the earliest investors in Alibaba, and the company's remarkable growth from a small player to a giant has been a key factor in establishing his reputation as a visionary in the tech industry.
As highlighted by the FT, market participants believe that Son may intend to borrow against Arm’s shares while retaining ownership of the company — just like he did with Alibaba.
“SoftBank has been wanting to monetise Arm for years,” Kirk Boodry, an analyst at Astris Advisory, recently told the Financial Times. “Arm is a quality asset, with punchy revenues and good margins. They can hold on to and still have the cash to use in other areas — in that respect it’s a perfect replacement for Alibaba.”
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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.
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