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What do we know about the ARM IPO?

SoftBank Group's ARM segment is expected to list in September, seeking a valuation of more than $52 billion in its initial public offering. The news was released on Tuesday as the chip designer begins its road show for what's expected to be the biggest US stock market flotation of the year.

ARM expects to trade on the Nasdaq Global Select Market under the symbol "ARM".

The offer is for 95.5 million American depository shares of the United Kingdom-based company. The shares are expected to price in the range of $47 to $51 apiece, which would raise the firm $4.87 billion at the top of the range, according to the regulatory filing.

The company has selected four investment banks to lead the listing - Goldman Sachs, JPMorgan Chase, Barclays and Mizuho Financial Group. 

In 2020, Softbank announced it would be selling ARM to US Chipmaker NVIDIA (NVDA), but the $80 billion sale fell through in February 2022 after numerous governments cited competition issues. The decision to list ARM instead will likely not be as profitable as its sale to NVIDIA would have been. However, ARM is in talks to bring in Nvidia as an anchor investor for the New York listing, alongside other Big Tech names such as Apple (AAPL) and Amazon (AMZN). 

The company was seeking an IPO because private investors in the SoftBank-led Vision Fund – who own 25% of ARM – wanted to be able to cash in through an IPO. However, SoftBank has just bought back Vision Fund's 25% ahead of the listing. ARM also wants to be able to give stock options as incentives to employees. 

Should the ARM IPO go ahead, it's likely to be one of the highest-profile floats in recent years and could provide a much needed boost to the IPO market. Especially now that the IPO has drawn the attention of such large names in Apple, Amazon, and NVIDIA, it's likely more investment interest will follow. 
 

What does ARM do?

ARM is a British semiconductor chip company, whose primary business is designing processors and other chips, as well as systems and platforms. ARM doesn’t manufacture computer processors itself but sells licenses to other production firms. It describes itself as the R&D department for the entire semiconductor industry.

ARM was spun out of a computing company called Acorn Computers in 1990. At the time, the company was part of a joint venture with Apple, which would make chips for the US titan’s first handheld computer. But the venture flopped, leading Apple to sell its 43% stake in ARM – the proceeds of which it used to buy NeXT – an American technology company founded by Apple’s former-CEO Steve Jobs.

Shortly afterwards, Nokia (NOK) started using ARM-based solutions, and by the end of the 90s, so had the rest of the mobile-phone manufacturing industry, including Apple. Upon his return to the company, Jobs started using ARM-based chip designs as the basis for the first iPod, iPhone and iPad.

Eventually, ARM was bought by SoftBank in 2016 for $24 billion – a 43% premium over ARM’s share price at the time. SoftBank had to take on more debt to finance the deal, which many questioned at the time, but its gamble was spot on as ARM chips soared in popularity.

ARM’s designs are now found in a huge range of devices, such as tablets, computers, smart TVs, smart homes, electric vehicles, drones, electronic passports, and even automatic streetlights. Its technology is found in around 95% of the world’s smartphones – including Apple, Android, and Samsung – and 95% of chips designed in China.
 

How much is ARM worth?

ARM is worth $52 billion, according to its most recent regulatory filing for its IPO pricing range. However, it was recently valued at $64 billion according to documents on an internal transaction between SoftBank and Vision Fund. Both of these values are at the higher end of the expected valuation range of $30 billion to $70 billion.

With this valuation, the chip designer is set to be the most valuable company listing on US markets since at least November 2021, when electric-vehicle maker Rivian (RIVN) went public with a market cap of $70 billion - Rivian is currently trading at closer to a $20 billion valuation. 

However, some investors may remember that this valuation is still much lower than ARM's previous $80 billion valuation in 2021, amid the company's deal with NVIDIA. The value of the sale was directly tied to NVIDIA’s stock price as SoftBank would be taking a 10% stake of the US firm. The deal’s valuation was originally set at $40 billion, but during the global chip shortage, NVIDIA’s share price shot up and so did ARM’s valuation. 

How does ARM make money?

ARM makes most of its money through the royalties it collects every time a company makes a chip using its design. And thanks to the company’s market dominance, over 160 billion chips have been made based on ARM designs as of last year. It's estimated nearly 70% of the world's population uses an ARM-based product. 

In its prospectus, ARM revealed that its revenues are dependent on China - neither ARM nor SoftBank controls the local company it uses - which may concern potential investors given how much the US is restricting semiconductor companies there. 

In SoftBank’s Annual Report for 2021, it was stated that ARM’s technology royalties had grown 16.7% year-on-year. ARM’s non-royalty revenue is taken from the licenses for processor designs to other semiconductor companies. These companies pay an up-front fee to gain access to the technology – and then a subsequent royalty on every chip that uses one of the designs.
 

Is ARM profitable?

Yes, ARM saw net profit of $534 million in the 12 months to March 31, according to the company's prospectus - however, this was down 5% year-on-year. ARM's revenues over the same period were $2.7 billion, down 1% year-on-year. This comes amid a slowdown in the smartphone market. ARM intends to deal with the headwinds by branching into new potential growth areas, such as automotive and cloud computing. 

What is ARM's business model?

ARM’s business model is very much based on staying ahead of the curve when it comes to technological advancements.

The company acknowledges that new applications, device categories, and markets are continually emerging, which require advanced semiconductors to provide their capabilities. So, ARM actively tries to predict the products that consumers and businesses will need in 5-10 years’ time by investing in R&D. In doing so, the company hopes to ensure that it can develop technology ahead of the competition.

According to the ARM annual message for FY 2021, the company has been investing to develop new processor technology to:

• Maintain its market position in areas where it is already strong, such as smartphones, consumer electronics, and embedded computing
• Increase royalty revenue per chip by increasing value where it can provide more technology or more valuable technology
• Establish market leadership in emerging technology areas including autonomous vehicles, IoT, and augmented reality headsets
• Introduce new business models to change the competitive landscape, for example, by directly licensing its technology to OEMs and cloud companies

Who are ARM’s competitors?

ARMs main competitors are still the likes of IBM, Intel (INTC), and AMD who also produce semiconductor chips. Although, ARM no longer has any significant competition within the smartphone chip space.

In terms of graphic processing units (GPUs), ARM faces competition from other giants like NVIDIA, Qualcomm (QCOM) and Intel. Although it's worth pointing out that for the most part, these other manufacturers have combined their proprietary GPUs with ARM-licensed designs.

Who owns ARM?

ARM is owned by Japanese conglomerate Softbank, who’s portfolio also includes 400 other companies, such as office-sharing firm WeWork, Uber-competitor Grab, and used-car company Auto1. The Japanese conglomerate will still own 90.6% of ARM's ordinary shares after the offering closes, but it will not receive any proceeds from the IPO.

The company has a total market cap of $76.61 billion as of March 2022, making it among the top 200 most valuable companies worldwide.

ARM’s management team

• Rene Haas – Chief Executive Officer
• Inder M. Singh – Chief Financial Officer
• Kirsty Gill – Chief People Officer
• Simon Segars – Advisor

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