Arm Holdings IPO Prices at $51 per Share

Arm Holdings, a leading chip design company, has priced its initial public offering (IPO) at $51 per share. This is at the top end of the expected range, which was set between $47 and $51. As a result, the company now holds a valuation of $54.5 billion on a fully diluted basis.

Leading Provider of Chip Designs

Arm Holdings provides chip designs to a wide range of semiconductor manufacturers, including the processors used in nearly every current smartphone. It's important to note that Arm does not manufacture chips itself.

Ownership History

In 2016, SoftBank Group acquired Arm Holdings for $36 billion. However, a recent deal to sell Arm to Nvidia for $40 billion in cash and stock fell through in 2022 due to regulatory opposition. Following the completion of the deal, SoftBank will retain a 90% stake in Arm. The company's stock will trade under the symbol ARM.

Financial Performance

In the fiscal year ending March 2023, Arm reported revenue of $2.679 billion, slightly down from $2.703 billion in the previous year. This decrease can be attributed to a soft smartphone market, which is responsible for the majority of the company's royalty revenue. Net income for the year amounted to $524 million, compared to $549 million in fiscal 2022.

SoftBank's Perspective

If the IPO pricing holds up when trading begins on Thursday, it will be a significant success for SoftBank Group. The company has faced challenges in recent quarters, particularly with losses in its Vision Fund venture capital portfolio. SoftBank has not disclosed its plans for using the proceeds from the IPO, but founder and CEO Masayoshi Son has expressed a desire to pursue more aggressive investments in AI-related ventures.

However, SoftBank's large ownership stake in Arm could potentially create concerns in the market if investors worry about the company liquidating its position. SoftBank has not provided any information regarding the duration of its ownership or any plans to reduce its stake. Historically, SoftBank has gradually sold off portions of its major investments, such as Alibaba (BABA).

It will be interesting to see how Arm Holdings performs in the stock market and how SoftBank navigates its role as the majority shareholder. The future strategic moves of both companies will likely shape the industry's landscape.

SoftBank to Purchase 25% Stake in Arm

SoftBank, the multinational conglomerate, has acquired a 25% stake in Arm from the Vision Fund for $16 billion. This move values the company at $64 billion, twice the initial investment made by SoftBank. The agreement stipulates that the payment will be made in installments over a two-year period. While there is a potential risk of overpaying if the stock performs poorly, SoftBank Group investors stand to benefit if Arm's price appreciates over the next two years.

Interest from Prominent Tech Companies

According to Arm's IPO prospectus, several notable tech companies, including Advanced Micro Devices (AMD), Apple (AAPL), Google, Intel (INTC), Nvidia (NVDA), Samsung, and Taiwan Semiconductor (TSM), have expressed interest in purchasing up to $735 million worth of shares at the IPO price.

Analyst's Positive Outlook

New Street Research analyst Pierre Ferragu has initiated coverage of Arm with a Buy rating and a target price of $59. Based on his estimates, he believes that Arm will be valued at $82 billion by 2026. This valuation is determined by applying a multiple of 27 times royalty revenue and 40 times pretax earnings, with royalty revenue projected to grow in the mid-teens annually over the next few years.

Ferragu predicts that despite a flat revenue in 2022 due to a downturn in the mobile-phone market, Arm has the potential to achieve low double-digit growth on average over the next five years. He also envisions that pretax earnings will triple during this period, as incremental revenue can be generated with minimal costs.

Contrasting Opinion on Valuation

Tech fund manager Paul Meeks from Independent Solutions Wealth Management holds a different view on Arm's proposed valuation. He argues that the valuation of Arm shares appears "badly stretched" at about 20 times trailing annual sales and nearly 100 times trailing profits. Meeks suggests that such an aggressive valuation is atypical for a company that demonstrated no growth in its latest fiscal year.

Moreover, Meeks highlights the company's vulnerability to risk factors associated with its exposure to China, which accounts for approximately 25% of Arm's revenue.