ARM Holdings PLC (ARM, Financial) has bursted back onto the scene after seven years under SoftBank Corp.'s (TSE:9434, Financial) umbrella, sparking a fiery debate among investors.
The British semiconductor giant went public through an initial public offering on Sept. 14, reigniting the interest of many investors. However, does it offer good value? Let's find out.
Background and history
Before being snapped up by Japanese conglomerate SoftBank in 2016, ARM was an outstanding investment, a "10-bagger" from 2006 to 2016. Moreover, Nvidia Corp.'s (NVDA, Financial) failed attempt to purchase it highlights the company's potential value, considering Nvidia CEO Jensen Huang is among the industry's visionaries.
ARM's origins trace back to the U.K., where it evolved into a significant entity in the semiconductor design space. Rather than manufacturing chips itself, the company specializes in creating designs that other companies license to manufacture.
The company's journey took a significant turn in 2016 when it was acquired by SoftBank, a Japanese multinational conglomerate founded by Masayoshi Son. It purchased ARM in a deal that valued the chip designer at around $31 billion.
In 2023, after being privately owned by SoftBank for about seven years, ARM made a resounding return to the public markets with its massive IPO. ARM's debut was significant not just for its scale, but for its timing and context. The company managed to raise $4.87 billion, making it the most substantial IPO of the year.
The IPO valued ARM at more than $65 billion, a testament to its growth and importance in the tech sector. On its trading debut, the stock price climbed 25%, further boosting its market valuation.
Significant investors
Highlighting its industry prominence, ARM's IPO attracted investments from some of its most significant customers. Major tech entities like Intel Corp. (INTC, Financial), Apple Inc. (AAPL, Financial), Nvidia, Samsung Electronics (SSDIF) and Taiwan Semiconductor Manufacturing Co. Ltd. (TSM, Financial) were among those who invested in the stock during its public listing.
Comparative milestones
ARM's listing was the largest in the U.S. since the electric vehicle manufacturer Rivian Automotive Inc.'s (RIVN, Financial) IPO in October 2021, which was valued at $13.7 billion. Additionally, the IPO is on track to be one of the technology industry's largest-ever listings, though still smaller than industry behemoths such as Alibaba Group Holding Ltd.'s (BABA, Financial) 2014 offering ($25 billion) and Meta Platforms Inc.'s (META, Financial) 2012 debut (then known as Facebook), which raised $16 billion.
Impact on SoftBank
The successful IPO of ARM also reflects favorably on SoftBank and Son. The congomerate's share in ARM appreciated by around $12 billion due to the successful listing. Following the IPO, ARM's positive market response also positively impacted SoftBank's stock price, with its shares seeing significant intraday gains.
Overall, ARM's history has been characterized by strategic decisions, significant partnerships and a clear vision of its role in the semiconductor industry. The company's successful IPO and the subsequent market response underscore its critical place in today's tech landscape.
Growth potential
ARM is not a small player. It is the dominant force in CPUs, integrating its technology into over 99% of global smartphones. Beyond phones, the company's chips power many devices - from computers and smartwatches to vehicles and data centers. The company's exposure to burgeoning sectors such as cloud computing, electric and autonomous vehicles and artificial intelligence offers substantial growth prospects.
The company's IPO documentation further showcases its ambitious vision. Its CPUs already power AI functions in billions of gadgets, partnering with giants like Alphabet Inc. (GOOG, Financial), Meta Platforms and Nvidia. ARM pegs its total addressable market at a whopping $200 billion.
Valuation concerns
With the IPO valuing ARM at around $55 billion and its market cap now hovering around $65 billion, a premium is attached. The company's trailing price-sales ratio sits at an elevated 24, even considering a hypothetical 30% revenue boost this fiscal year.
Comparing ARM's valuation to other semiconductor companies reveals it is steeper. Such a valuation might be palatable if the company showcased substantial revenue growth, but ARM's recent financial performance does not necessarily warrant this high multiple.
The excitement around ARM's public debut is palpable. Reports suggest the offering was oversubscribed by over five times. Yet, with so many bankers involved in the roadshow, some see this as a red flag. Furthermore, while tech behemoths like Nvidia, Apple and Alphabet showed interest in the stock, there must be a long-term commitment to the company's success trajectory.
Potential risks
ARM, a luminary in the semiconductor design realm, faces multifaceted challenges that could temper its forward momentum. A cornerstone concern lies in its customer base; an inability to onboard new clientele or upsell to its current roster could considerably dent its financial health. Simultaneously, the intense competition in the industry casts a shadow.
With a commendable but not impregnable 49% market share, ARM is vulnerable to rivals nibbling away at its dominance. Moreover, big-ticket customers like Intel Corp. (INTC, Financial) and AMD (AMD, Financial) opting to license its architecture only to craft their processors could herald a drop in ARM's revenue trajectory. In the fast-paced world of technology, stagnation is regression. If ARM falters in its innovation cycle, especially in the face of relentless technological evolution, its market standing could be jeopardized.
Further complicating the landscape is ARM's considerable revenue reliance on China. This link exposes the company to the region's unpredictable political and economic whims, making it crucial for the company to tread with geopolitical acumen.
Final thoughts
ARM's success in the smartphone era is undeniable. However, as the world moves into a post-smartphone epoch, the challenges multiply. The excitement around its IPO, the high valuation and potential growth risks make me cautious. Investors should proceed cautiously, ensuring they only get caught up in the IPO frenzy after analyzing the fundamentals.
