Arm Holdings is gearing up for a potentially game-changing initial public offering (IPO) fueled by the growing adoption of artificial intelligence (AI). While the IPO market faced a slump in recent times due to various factors, including a market downturn in the previous year, signs of a rebound are emerging. One significant indicator of this resurgence is the buzz surrounding the impending IPO of Arm Holdings.
In 2020, Nvidia made a US$40 billion bid to acquire Arm Holdings, renowned for its central processing unit (CPU) designs used in smartphones. However, regulatory challenges thwarted this acquisition. Now, Arm is looking to leverage its expertise in semiconductors and the booming AI sector to achieve a staggering valuation of US$50 billion in its IPO, potentially securing a major win for its owner, Softbank Group.
While tech enthusiasts and investors alike are buzzing with anticipation about this IPO, a cautionary note deserves attention.
In a recently revised F-1 filing, Arm disclosed its intention to list its shares on the Nasdaq Stock Exchange under the ticker “ARM”. Initially, the company planned to issue 95.5 million American depository shares, with an offering price range of US$47 to US$51 per share. This could have raised up to US$4.8 billion at the upper end of the range, placing Arm’s valuation at approximately US$52 billion. Even after the IPO, SoftBank would retain the majority of shares, maintaining control of nearly 91 percent of the company.
Recent reports suggest that Arm’s offering has been “more than five times oversubscribed,” as initially reported by the Financial Times. This indicates a surge in interest among institutional investors, including investment banks and pension funds, eager to participate in what could become one of the largest IPOs in recent years.
To promote the IPO, Arm Holdings engaged a multitude of investment banks for a series of presentations, commonly known as a “road show”, aimed at educating investors about the company and its prospects. The sheer number of bankers involved has raised concerns, serving as a potential red flag.
SoftBank also enlisted an impressive roster of technology giants, many of which are Arm’s key customers, to participate in the offering. Nvidia, Advanced Micro Devices, Apple, Alphabet, Intel, and Taiwan Semiconductor Manufacturing expressed interest in buying as much as US$735 million worth of Arm’s stock, although they are not obligated to do so.
In light of the heightened interest, SoftBank is now contemplating raising the proposed IPO stock price even further to maximize its gains from Arm’s IPO.
Arm’s original IPO price range would have already placed the company in an exclusive valuation bracket. For the fiscal year ending March 31, 2023, Arm generated US$2.68 billion in revenue, marking a 1 percent decline year-over-year. Net income stood at US$524 million, representing a 5 percent decrease. These figures suggest that Arm has not yet fully harnessed the immense potential presented by generative AI, a factor that could significantly impact its financial results.
A valuation ranging from US$48 billion to US$52 billion would translate to a price-to-earnings (P/E) ratio of 92 to 99 times its trailing 12-month earnings. For context, Nvidia currently trades at a P/E ratio of 110 based on trailing 12-month earnings. However, in its fiscal 2024 second quarter (ended July 30), Nvidia reported US$13.5 billion in revenue, a remarkable 101 percent increase, with net income soaring to US$6.2 billion, an astonishing 843 percent surge. This stark contrast highlights the challenges faced by Arm in positioning itself as the next Nvidia.
While Arm Holdings undoubtedly holds a prominent position in the semiconductor industry, the frenzy surrounding its IPO could potentially lead investors to pay an excessively high price. Caution is advised given the exuberance surrounding this IPO.