The year’s most hotly anticipated initial public offering (IPO) in tech opened at the starting bell this morning, with ARM Holdings’ (ARM) stock beginning the day on Nasdaq at $51 per share. That’s the cost per share for the 10% of the company (95.5 million shares) Softbank is putting up for auction so far, aiming for a roughly $54 billion valuation on the stock.
This is actually Arm’s second IPO on Nasdaq. It was listed from 1998 until Softbank acquired it in 2016. “We are elated to welcome Arm back on Nasdaq,” said Karen Snow, Nasdaq’s global head of listings.
For investors, the big issue is future revenues, cash flow, and profits. With that in mind, news of Apple’s pre-IPO licensing agreement with Arm might provide some reassurance — as might the existence of a cross-industry consortium of big tech firms taking large stakes in the stock before it hit market.
(Apple, Alphabet, Samsung, Microsoft, TSMC, Intel, and Nvidia all took out anchor investment positions. An anchor investor is an institutional investor who acquires a large number of shares in a company at an agreed, fixed price before the IPO takes place. This helps maintain value and create stability in the shares, while also giving those investors some negotiation power.)
TSMC Chairman Mark Liu said of his company’s $100 million investment: "Arm is an important element of our ecosystem, our technology and our customers' ecosystem. We want it to be successful, we want it to be healthy. That's the bottom line."
Analyzing company health
Before the IPO, Arm shared extensive information about its own financial health. This showed 2021 revenue of $2.7 billion and confirmed earnings that have grown at 16.2% CAGR across the last three years. It also revealed an average gross margin of 95%. The headline data doesn’t account for revenue costs, such as R&D, staffing and the cost of doing business, but the margins are impressively high. The balance sheet is strong, and Arm claims 70% of the global population already use products containing its technologies.
Why the Arm IPO matters
Arm’s chip designs are widely used across the industry, with Apple’s Macs and iPhones exemplifying the importance of what the Cambridge, UK-based company creates. The “jewel in the crown” of UK technology before its $32 billion purchase by Softbank in 2016, investors are hoping Arm will turn that accelerating adoption into profits in roughly the same range (albeit at smaller scale) as those generated by Nvidia.
That’s what they’ll be looking for, and also what the closing bell stock price will reflect. As of early afternoon in the US, the stock's share price high was $61.99, the low was $55.54
Meanwhile, current UK Prime Minister Rishi Sunak will be licking his wounds, having failed to convince Softbank to list Arm’s stock on the UK market, in part because Brexit has badly hurt the UK economy.
In the background
Softbank’s IPO for Arm Holdings follows Nvidia’s failed attempt to take over the company, which fell through following intense regulatory scrutiny. That’s important, as the feeling across the industry and regulators was that Nvidia’s takeover would concentrate power in processor technology and manufacturing to the detriment of the industry and consumers.
Arm may be smaller than Nvidia, but the UK firm first launched by Apple and partners to create mobile processors for the ill-fated Newton handheld has become ascendant in the market for mobile processors.
What is Arm’s business?
Arm doesn’t actually make processors; its 7,170 employees design them and Arm makes money by licensing those designs.
“Think of what we provide as a blueprint,” said Ian Thornton, Arm’s vice president of investor relations. "We license those processor designs to the companies who design or manufacture computer chips. They pay us an initial license fee, and then a royalty fee on every chip that uses our designs."
Today, you’ll find around 250 billion Arm-based chips embedded in products used worldwide each day, which reinforces the importance of the offering. Licensors (and their foundry partners, such as TSMC in Apple’s case) manufacture the chip designs they build based on Arm’s blueprints.
What’s unique about these advanced RISC (reduced instruction set computer) designs is that they are built to be integrated within hardware. That means the chips — such as those Apple creates — also carry other system components. The result is that hardware running processors derived from Arm designs get significant performance and energy consumption advantages compared to discreet chip designs.
That is also why companies now licensing Arm’s technologies will probably continue to do so — at least until a better alternative emerges.
Aim aims for growth beyond smartphones
While most tech watchers probably know Apple uses Arm reference designs to develop the chips inside Macs, iPhones, and iPads, Apple isn’t unique. MediaTek, Qualcomm, Samsung, and others also have similar arrangements.
The pressure Arm faces is that the smartphone market has become a little saturated. With that in mind, the company is attempting to build presence in other growth sectors, such as cloud computing and car electronics.
While it’s true the company already has presence in some cars, drones — even passport electronic ID chips — it needs to make a bigger dent in new sectors if it hopes to achieve the kind of growth shareholders will expect in exchange for $51/share. Much hinges on the extent to which investors believe the company can grab growth in hot emerging tech sectors, the impact of jobs data, interest rate rises, and how investors feel about investing in such a high value stock almost completely comprised of IP rights.
The company knows this is its weakness, but argues strongly the opportunity outweighs the risk.
“The scale of Arm’s reach continues to expand, because everything today is a computer, and with the advent of the AI era, the world’s computing needs are continuing to grow substantially. It’s an exciting future, and a future being built on Arm,” said Will Abbey, Arm executive vice president and chief commercial officer.