SoftBank’s Chip Maker Could Go Public As Soon As Next Week

Key takeaways

• Arm Holdings’ valuation has gotten a downgrade to $52 billion ahead of its IPO next week
• The chip maker’s exposure to China and the smartphone market are concerns for investors
• It’s still set to be the biggest IPO since Rivian’s in 2021

Arm’s superstar IPO roadshow has begun, with the chip maker courting investors ahead of its much-anticipated market debut on the Nasdaq Composite next week. Based on the proposed share price, Arm’s valuation has been downgraded – a potential sign the company is more like Qualcomm than Nvidia.

With concerns about the smartphone market and its exposure to China, Arm has a potential uphill battle to achieve its valuation. But with so many high-profile tech companies interested in the IPO, the downgraded valuation could be a tactic to drum up more interest. Here’s what we know so far.

What’s the latest with Arm’s IPO?

Arm has now priced its IPO and is looking to achieve a revised valuation of $52 billion. Arm executives were in Baltimore this week, where asset manager T Rowe Price
TROW
is headquartered. Reuters also reported Arm met with other investors, including Sands Capital, in a bid to drum up interest around what’s expected to be the biggest IPO of the year.

The chip maker is set to issue 95.5 million American depository shares, each representing one ordinary share, at $47 to $51 each. With just over a billion shares outstanding after the IPO, Arm Holdings’ target valuation is between $48.2 billion and $52.3 billion.

What’s all the fuss about?

The U.K.-based chip maker isn’t exactly a household name, yet the company is set to launch the biggest IPO since EV maker Rivian fetched a $66 billion valuation in 2021. But why is everyone keen to get a slice of the Arm pie?

It’s because of what Arm makes: semiconductor chips, including designs for the components and the programming language needed to make them work. Arm then licenses out its IP to other companies so they’re permanently hooked into the system, thus placing Arm at the very center of the tech infrastructure we know today.

Arm Holdings has a unique position in the market where it supplies 99% of the world’s smartphone chips but isn’t beholden to any one company. Over 260 companies use Arm’s semiconductor chips to manufacture over 30 billion chips each year. Its client base includes the likes of Apple, Microsoft, Nvidia and almost every major tech company you can shake a stick at.

Arm has also recently expanded into making chips for smart cars, home appliances and wearables and needless to say, it’s also getting in on the AI hype. In May, Arm unveiled two new machine learning chips, the Cortex-4 CPU chip and the G720 GPU unit, which use 40% less and 22% less bandwidth, respectively, compared to their predecessors.

Arm isn’t the next Nvidia

We must address the elephant in the room: a $52 billion valuation isn’t as much as SoftBank initially hoped for. The Japanese investment firm purchased Arm for $32 billion in 2016 – at the time, it was the most significant European deal. SoftBank had previously touted Arm’s valuation at $64 billion and was looking for between $60 billion and $70 billion for the market debut.

So, what gives? It could be a tactic to help build momentum for the actual debut. SoftBank is said to have several Arm clients, including Google
GOOG
, Apple and Nvidia, lined up to invest in the IPO, which will surely drum up more interest from other potential investors.

Nonetheless, Arm doesn’t look like it will soon be the next Nvidia. For a start, its financials aren’t in the same league – in its most recent fiscal year, Arm recorded $2.68 billion in revenue and a net income of $524 million. That makes the trailing price-to-earnings ratio in the region of 92 to 100 times, which is less than Nvidia’s 117 times trailing price-to-earnings ratio.

Arm’s dominance in the smartphone industry is also its weakness, given the global slowdown in mobile phone sales. In 2022, around 1.39 billion smartphones were sold worldwide, and 2023’s forecast is expected to drop to 1.34 billion. That’s a bit of a problem for Arm’s projected growth trajectory.

The company also has more exposure to China than other chip makers, which could be an issue if geopolitical tensions worsen. Arm said in its filing that China accounted for 25% of its revenue in its most recent fiscal year, up from 18% the year before.

SoftBank needs a win

Now let’s address the other elephant in the room: SoftBank really, really needs Arm’s IPO to go well. In May, its $100 billion Vision Fund tech investment arm recorded a whopping $32 billion loss – an unfortunate record for the Japanese conglomerate.

Some of that was due to the stock market’s dire performance in 2022, but SoftBank doesn’t have the best track record of investments at the moment. It took a $4.4 billion stake in the troubled office company WeWork, valued at its peak at $47 billion but now worth only $474 million.

SoftBank also made a $9.3 billion investment in Uber, which suffered a string of bad headlines around its alleged toxic workplace culture before going public. The company is worth around $47 billion, down from its peak of $74 billion.

In short, SoftBank has some serious catching up to do after going into what it called “defense mode” last year. The Japanese company’s share price has fallen 2.16% in the last five days but is up 13.5% overall since the start of 2023.

The bottom line

Arm may not achieve the initially hoped-for valuation, but it’s still set to make more money than last year’s failed $40 billion deal with Nvidia. As the roadshow continues, the rumor mill will be abuzz with who’s set to invest – and whether that revised $52 billion valuation is on the conservative side.

Investors will be weighing up their options, as Arm’s overexposure to the sagging smartphone market and increased China revenue is a worry. If Arm and SoftBank can alleviate those fears between now and next week, we’re in for a spectacular IPO debut.