Key takeaways
- Semiconductor chip company Arm has filed for an IPO on the Nasdaq
- The move comes as Arm’s financials falter in second quarter due to slower smartphone sales
- Arm is looking for a valuation of up to $70 billion
It’s a party in the USA (markets) this week. The semiconductor chip maker Arm has officially filed for its IPO on the Nasdaq, which could spark a boom in new tech IPOs. The market dried up as high interest rates hammered M&A activity, with Arm’s owner Softbank suffering heavy losses as a result.
The company is looking for an eye-watering sum of between $60 billion and $70 billion, but with plenty of risks on the horizon, there’s no guarantee that Arm will get what it wants. Here’s everything you need to know about the upcoming IPO and why some investors might not be jumping for joy.
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What’s happening with the ARM IPO?
Arm is heading to the U.S. for its IPO, a new filing revealed on Monday. Based in Cambridge in the U.K., it’s a blow to the London Stock Exchange, which has been trying to woo Softbank and Arm for years to list there and become the jewel in the LSE’s crown.
Arm is a tech company that designs semiconductor chips, including the components and programming languages needed. The business model involves licensing its IP to other companies so they can build their own systems around them. As a result, Arm is an indispensable part of the tech infrastructure we know today.
Back in 2016, Japanese investment company Softbank Group decided to purchase Arm for $32 billion – at the time, it was the biggest-ever acquisition of a European tech company. Since then, Arm has expanded into making chips for smart cars, wearables and home appliances.
It’s also moved to support the world’s transition into AI. In May, Arm debuted two new chips for machine learning systems – the first is a new CPU chip, Cortex-4, that is 40% more energy-efficient than its predecessor. The other is a new GPU unit, G720, which uses 22% less memory bandwidth.
Softbank shares on the Tokyo Stock Exchange jumped 2.6% at the news, a good sign for the debut, which many other tech companies will watch as a litmus test for their potential IPOs. Softbank has a lot riding on the IPO after some disastrous investments in WeWork, Didi Global and Uber, all part of the company’s Vision Fund, lost Softbank billions.
Arm’s place in the tech world
Why is the IPO set to be one of the biggest debuts in history, yet it’s a name most off of the street haven’t heard of? Because of what ARM makes and the client base it’s attracted over the years.
Over 260 tech companies use ARM’s semiconductor chips to produce 30 billion chips annually. That means ARM is responsible for 99% of powering the world’s smartphones, supercomputers, sensors, and almost everything else you can think of.
The client base includes top dogs like Apple, Intel, Google and Microsoft, to name a few. Arm’s owner, Softbank, has confirmed only 10% of shares from the IPO will be sold to clients.
And these Big Tech behemoths won’t go down without a fight. Arm was in talks last year to be acquired by Nvidia for $40 billion, but the deal fell through after other chip makers got antitrust regulation involved. Nvidia is still one of Arm’s biggest clients, licensing its supercomputer tech for data centers.
Then there’s Apple, who was part of the group that founded Arm in 1990. Samsung has close links with Softbank, and Intel needs Arm to expand its foundry business. Amazon uses Arm for its cloud computing business, while Alphabet needs Arm’s chips for Android phones.
It’s therefore vital to each of these companies that Arm stays neutral in the IPO, and that’s most likely why only a fraction of the debut will be available to clients. Another reason is that it works in Arm’s favor: an IPO strengthens ties with existing clients without giving up a seat on the board.
Can Arm achieve a hefty valuation?
Arm is looking to reach a valuation between $60 billion to $70 billion. Is that justified, or could Arm be disappointed in what investors think the company is worth? The IPO filing notes that the company was valued at roughly $64 billion in a recent stake sale by Softbank.
That might be considered steep by some on Wall Street, given Arm generated $2.68 billion in its last fiscal year with a net income of $524 million. But other investors will look beyond the figures at the potential: around 70% of the planet uses a product powered by an Arm semiconductor chip, with 80% of the company’s employees focused on research and development.
At the heart of Arm’s perceived success is the long-term AI revolution. Arm powers companies like AI darling Nvidia and other Big Tech companies to build energy-efficient chips, which will be vital to developing hardware powerful enough for AI. Amazon is also incorporating Arm’s designs in bolstering its cloud computing capabilities for the coming AI demand.
The fly in the ointment is Arm’s financials, which haven’t shone compared to Nvidia’s. For the quarter ending June 30, Arm made $605.5 million, but the slowdown in smartphone sales also affected the chip maker. Arm’s net sales fell 4.6% year-on-year and saw a 9.5 billion yen loss. These latest results might give investors pause for thought.
Geopolitical tensions with China are another concern. Arm’s IPO listing detailed the perceived risks of China’s economic turmoil and the potential loss of its Chinese subsidiary, which is its single largest customer and makes up nearly a quarter of Arm’s total sales. The company also warned that royalty and licensing revenue could be impacted in the future, with Arm already experiencing a slowdown in revenue growth in China last fiscal year.
The bottom line
Investors and tech companies alike will be watching with bated breath to see how Arm’s IPO performs. While the expectations are high, and the debut has the potential to be one of the largest ever, there are some headwinds that the company faces, which may give Wall Street second thoughts about how valuable Arm actually is. Whatever happens, the IPO promises to be an interesting one.
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