As the clock ticks down to the unveiling of Arm's initial public offering (IPO) in the US, investors diligently perused the company's reported financial metrics.
In what is likely to be the year's largest US IPO, many are out to discern the legitimacy of the British chipmaker's ambitious valuation aspirations in a market hungry for AI stocks.
Arm's valuation ambitions range between US$60 billion and US$70 billion (or approximately $93 billion to $109 billion). Its upcoming NASDAQ listing timed to capitalise on surging investor interest in companies poised to benefit from AI advancements.
SoftBank, Arm's parent company, previously acquired a quarter of Arm through the Vision Fund for US$64 billion. This valuation contrasts starkly with the market valuations to smaller industry players like Synopsys (NASDAQ:SNPS) and Cadence Design (NASDAQ:CDNS) Systems. On a price-to-sales comparison with these entities, Arm’s valuation would be in the ballpark of US$32 billion to US$43 billion, based on Arm's revenue last year of US$2.68 billion.
This valuation range aligns with insights shared by Bernstein Research analysts, who view Arm as the clear market leader for semiconductor design and support a valuation of around the US$40 billion mark. However, Bernstein see potential for further upside as more information is made available during the IPO such as profitability improvements and future AI applications.
Navigating AI’s worth
Deciphering a pre-IPO valuation is no easy task, and the buzz around AI further complicates Arm's potential worth. Adding to this complexity is Arm’s unique revenue stream, where income principally stems from royalties levied on chip manufacturers that use its designs.
This makes it difficult to compare Arm to its peers. Chip behemoths Nvidia and Advanced Micro Devices (NASDAQ:AMD), for example, boast among the highest valuations in the Nasdaq 100 index, when considering share price in relation to historical earnings.
Yet, a shift in perspective to future earnings paints a drastically different picture. Using an average blended forward price-to-earnings ratios across Nvidia, AMD, Synopsys, and Cadence, for Arm to validate a US$40 billion valuation it would need income of US$41.1 billion, or income of US$1.7 billion to substantiate a US$64 billion figure.
Projecting accurate revenue forecasts for a firm like Arm is difficult, especially when it must navigate a semiconductor industry in recovery mode following a downturn in sales triggered by inventory gluts, chiefly in the mobile phone sector.
Nevertheless, AI's meteoric rise has thrust Nvidia into the limelight with a staggering 220% growth this year – a leap that added almost US$800 billion to its coffers. This surge in interest could influence investors to rally behind Arm's forthcoming public debut, as the chipmaker portrays itself as a major driver of AI's future trajectory.
In terms of immediate next steps, Arm is set to commence its promotional roadshow in early September, with the IPO price to be set a week later.