Huge IPO Arm - will stock debut drive AI sector? 🔌

3:48 PM 14 September 2023

The stock market debut of Arm Holdings (ARM.US) is reverberating through the financial press and is once again electrifying the artificial intelligence sector. Today is the debut day on the Nasdaq  but a rebalancing is currently underway with the opening price still being determined. Last year, the company was unsuccessfully tried to be acquired by Nvidia (NVDA.US), and UK Prime Minister Rishi Sunak sought its return to the floor of the London Stock Exchange. In the end, its listing will take off on the Nasdaq today, with a valuation of $54.5 billion, indicating that this is the largest IPO in more than two years, when EV maker Rivian (RIVN.US) was valued at more than $66 billion. 

The idea behind the IPO

Japan's SoftBank, known for its strong exposure to the technology sector, is behind the company's listing on the Nasdaq. The British Arm company is the largest designer of chips for smartphones and could potentially benefit from a wave of interest in new AI capabilities. Currently, chips designed by the company are present in most smartphones in the world including iPhones. The company itself was founded in 1990 as a joint venture between Acorn Computers, Apple and VLSI. It was listed on the London Stock Exchange and Nasdaq from 1998 until 2016, when SoftBank acquired Arm for $32 billion, taking it off the exchange. After rejecting Nvidia's offer, the company is conducting an IPO.

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What is Arm known for?

Primarily for designing and manufacturing chips for smartphones but the company has ambitions to become a competitor to Nvidia in the AI chip market.

  • Arm's biggest customers include technology giants such as Apple (AAPL.US), which in early September decided to extend a long-term chip supply agreement from the British giant
  • The company designs and manufactures chips for most of the world's smartphones. It is estimated that its products are used in up to 95% of all modern phones
  • The company is working to expand beyond the smartphone market, which has been stagnating. The target for Arm is becoming more advanced chips, particularly chips for data centers and generative AI applications. This is where the company sees its opportunities;
  • Arm claims that the processors it designs will accelerate the development of artificial intelligence and machine learning allogrithms. Arm has already begun adding new features to make the algorithms run faster and is creating viable solutions for the chip market;
  • Speculation from the tech sector indicates that a potentially successful IPO could be a catalyst for dozens of tech startups. 

Is valuation too high?

  • The IPO share price has been set at $51. The sale of 95.5 million shares will generate about $4.87 billion in profit for Softbank. Market reports originally suggested a higher IPO price, but the banks were said to have convinced Softbank to lower it in order to stimulate demand on the day of the debut;
  • However, there are elements of risk in the background. Some market analysts are questioning the company's initial valuation, noting that it is 36% higher than the $40 billion initial takeover bid by Nvidia last year. On the other hand, however, at the time of Softbank's deal with Vision Fund, Arm was valued at $64 billion;
  • The company's ability to grow has been questioned in particular, as it has recently experienced a decline in revenue due to weaker smartphone sales. Sales results for the fiscal year ended March 2023 were about 1% worse compared to the previous period
  • Arm has set aside more than $700 million in shares as part of the IPO so that it can be bought back by the company's biggest customers such as Apple Nvidia, Samsung and the world's largest chipmaker TSMC, which intends to invest $100 million in the company;
  • Since 90% of the shares are owned by SoftBank, which is listing the company, the new shareholders will not have a decisive influence on the company's policies. At the same time, however, the low free float (the number of shares available for trading) should support a possible price increase.

Arm says research and development is the company's lifeblood and spends more than 42% of its expenses on it. Only two companies in the S&P 500 index - drugmakers Incyte (INCY.US) and Merck (MRK.US) - devote that much to R&D. Among the semiconductor market leaders, the ratio of R&D spending to sales is: for Nvidia, 24%, and Intel, 31%. Source: SEC

Artificial intelligence - the opportunity for strong growth?

  • The company is not producing chips for complex AI tasks at this point, but does not rule out such development in the future. Nevertheless, at this point it is already quite a lag compared to Nvidia, which already has products designed for AI-related processing
  • The company to gain market share would have to compete primarily on price, which could ultimately provide some respite for companies currently 'doomed' to the dominance of Nvidia chips. Arm's base business appears highly cyclical and uncertain amid the risk of a recession in 2024. According to Counterpoint Research, smartphone shipments in the global market in Q2 totaled 294.5 million compared to 268 million in Q1. 

Arm's IPO is one of the most important events in the technology market this year and offers investors a chance to benefit from the growth of the semiconductor sector. However, the investment also comes with high risk and uncertainty, as competition in this market is quite high. It is worth noting that it is not always the case that a technology company gains with the emergence of a new trend in the market. An example is the recent strong rise in the price of Nvidia shares and the rather weak behavior of Intel shares.

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