Arm’s $52 billion IPO: Evaluating the Long-Term Prospects

Arm IPO Priced at $51 per Share, Valuing Company at $54 Billion

The highly anticipated initial public offering (IPO) of Arm, the chip design firm, has been priced at $51 per share, giving the company a valuation of over $54 billion. The IPO, which will see SoftBank retain 90% of the shares, is set to be listed on the Nasdaq later today. This valuation represents a 20X multiple of Arm‘s annual sales, which are currently falling.

For the fiscal year ending in March 2023, Arm reported a 1% decrease in revenue to $2.6 billion and a 5% fall in net income to $524 million. These numbers highlight the challenges that Arm is currently facing, especially considering the highly competitive nature of the semiconductor industry.

China and the Risks Facing Arm

One notable risk for Arm is its exposure to China. The company revealed that 24.5% of its sales are to “Arm China,” an independent entity that has faced serious governance issues. Despite these challenges, Arm China remains the company’s largest customer, which raises concerns, particularly in the current geopolitical climate.

Moreover, Arm faces competition from not only established technologies such as the x86 architecture but also from free and open-source technologies like the RISC-V architecture. In its own prospectus, Arm acknowledges that if the RISC-V architecture continues to be developed and gains market support, customers may choose to utilize this free alternative over Arm‘s products. This shift could pose a significant threat to Arm‘s long-term prospects.

Arm‘s Growth Potential and Market Share

While challenges and risks are present, Arm also sees several growth opportunities and has identified a total addressable market of $202.5 billion. In the fiscal year ending in March 2023, more than 30 billion Arm-based chips were reported as shipped, highlighting the company’s market presence.

Additionally, Arm‘s market share in the cloud computing silicon market has been steadily growing. The company’s share in this market increased from 7.2% in December 2020 to 10.1% in December 2022. Arm believes that by 2025, the cloud computing chip market will be worth approximately $28.4 billion. Factors such as soaring costs for sophisticated chip design and the trend of OEMs designing custom chips in-house for improved performance or efficiency contribute to Arm‘s positive outlook.

Investor Concerns and SoftBank Ownership

Despite the potential growth opportunities, some investors are cautious about Arm‘s IPO due to concerns about SoftBank’s ownership. SoftBank, known for its corporate governance issues, currently retains 90% of Arm‘s shares. Jamie Halse, a portfolio manager at Platinum Asset Management, expresses caution about investing in a company where SoftBank has such a significant ownership stake.

Furthermore, Arm‘s prospectus explicitly states the risks it faces from competition and the emergence of the RISC-V architecture. The prospectus acknowledges that x86 and RISC-V architectures have business models that differ from Arm‘s and may be more attractive to customers. The recent joint venture focused on accelerating the adoption of RISC-V, backed by influential companies like Qualcomm, NXP, and Bosch, adds to the concerns that RISC-V poses a threat to Arm.

Editorial and Advice

The Arm IPO pricing at $51 per share, with a valuation of $54 billion, is a significant milestone for the company. However, the challenges and risks it faces should not be overlooked. Arm‘s declining sales, exposure to the Chinese market, and the emergence of alternative architectures like RISC-V raise concerns about the company’s long-term prospects.

Investors should carefully consider these risks and evaluate whether Arm‘s growth potential and market presence outweigh the challenges it faces. While Arm currently holds a dominant position in the industry, disruptive forces are emerging that could impact its future success. It is crucial for investors to conduct comprehensive financial analysis and assess the comparative advantages of Arm against its competitors.

Arm‘s IPO will certainly be closely watched to understand the level of interest from prospective investors. Time will tell whether this IPO proves to be a successful investment, or if investors potentially face losses. As the semiconductor industry continues to evolve, it will be essential for Arm to navigate these challenges and remain at the forefront of innovation to secure its position as a leading chip design firm.