UK-based chip maker and semiconductor designer has secured a valuation of more than $54 billion before the trading starts on Thursday. The SoftBank-backed Arm that supplies the core chip design technology to Nvidia and Apple, sets share prices at $51 ahead of the IPO.
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The UK-based chipmaker is listing at least 95.5 million American depositary shares at Nasdaq, with SoftBank, its current owner controlling about 90% of the company’s outstanding shares.
SoftBank-backed Arm has a fully diluted market capitalization, including the outstanding restricted stock units, of over $54 billion at a price of $51 per share in this IPO. The company announced on Thursday, that its shares will be trading over the counter under the symbol of “ARM”.
Although, Arm mentioned in its prospectus that its revenue in the fiscal year ended in March dipped by almost 1% from prior years’ revenue of $2.68 billion, and the net income dropped by nearly 22% to $524 million. The stock offering is way higher than the initially expected price of $47.
The “rationale” for high valuations
One of the rationales given by the analysts for high IPO valuations for the SoftBank-backed Arm is that it is riding a wave of excitement around AI technology. The chipmaker is trying to crack open the tech IPO market after a long pause of nearly two years, and is set to be the biggest technology offering of the year.
Arm’s IPO valuation is exceedingly high for a chip design company, when compared to any player in the market, with the exception of Nvidia. At the current valuation of $54 billion, the price-to-earnings ratio will be around 104, based on the profit it recorded last year.
Although, Nvidia also has high valuations of 108 times earnings, but that is after considering a 170% expected increase in revenue for the current quarter, due to increasing AI chips demand. Moreover, the Invesco semiconductor ETF, which is formulated to measure the performance of the to 30 US chipmakers, has a comparatively lower price-to-earnings ratio of 25.
Another reason that market is giving premium valuation to the SoftBank-backed Arm is that its client base includes some of the biggest US technology companies. Some of its prominent clients include Apple, Nvidia, AMD, Google, Samsung, Intel, and others.
Apart from that, all of these companies are interested in buying Arm’s shares as part of this offering. According to some figures, nearly 99% of the mobile processors around the world are based on Arm’s technology.
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Arm’s technology
Arm’s design outlines how a central processor works at its most initial level, such as performing arithmetic operations or accessing a computer memory. The company was originally founded in 1990 to build semiconductor chips for various devices that contain batteries.
However, its flight started after it started to be used widely in smartphones. AN advantage with the Arm’s technology is that it uses less power than the x86 architecture used in PCs and server chips by AMD and Intel.
While some of its customers just use the instructions set and design their own PCs, Arm also licenses entire designs to other chipmakers to be used in their processors and chips.
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SoftBank in this IPO
Softbank earlier in 2016, paid $32 billion to acquire Arm, but the current IPO valuation of $54 billion is far less than the $64 billion valuation implied a month ago. The previous valuations were implied during a transaction between SoftBank and its vision fund, the $100 billion Saudi-backed investment tool that SoftBank manages.
As mentioned earlier that Arm had reported losses in the previous year, is due to the fact that its core market of smartphone chips has stagnated to a large extent. However, the UK-based chipmaker is hoping for growth through data center customers and artificial intelligence.
In a presentation to investors, Arm officials said that the company has a potential to go beyond the smartphone chips, into AI applications and data centers. They also said that the total market for chip design will reach approximately $250 billion by 2025.
Initially, Softbank hoped that the IPO would value Arm at $70 billion. However, it reported flat sales in the outgoing financial year, ending in March. In addition to that, the investors also have concerns regarding a significant drop in profits in the past quarter due to high exposure to the Chinese companies and risks related to it
