On Tuesday, September 5th, Arm's IPO application to regulators revealed a per-share ADS pricing between $47 and $51. With a total issuance of 95.5 million ADS, this places Arm's valuation at an estimated $52 billion.
SoftBank has conveyed a clear message to skeptical analysts and investors: after raising patent fees by about 40%, Arm's revenue is set to skyrocket in the coming years.
When SoftBank recently acquired shares of Arm not directly held by its Vision Fund, it valued Arm at $64 billion. Although this valuation didn't meet the expectations of Masayoshi Son, SoftBank's CEO, Arm remains a hot commodity in this year's semiconductor industry. It's poised to be the largest IPO globally this year, and this target valuation indicates a generally optimistic market outlook for Arm, placing it mid-tier among companies listed on the Philadelphia Semiconductor Index.
However, many analysts are not buying into SoftBank's rosy projections. They believe that Arm's $52 billion valuation might be inflated. While Arm isn't NVIDIA, from certain perspectives, it's almost as expensive. Yet, its rate and scale of business growth, revenue, and P/E ratio struggle to support Son's vision or justify the $52 billion valuation.
If priced at the midpoint of the IPO guidance range, Arm's price-to-sales ratio stands at about 18 times, with only NVIDIA having a higher ratio in the Philadelphia Semiconductor Index.
Analysts believe that companies like Apple, Google, NVIDIA, Samsung, Intel, and TSMC have agreed to be cornerstone investors in this issuance primarily to prevent Arm from being acquired by other cornerstone investors. This move to protect Arm's industry-neutral position might lead to a standoff among shareholders post-IPO, complicating decisions about ultimate control.
Arm is betting on the rapidly growing AI market's "computational race." However, some analysts believe that Arm is on the fringes of the AI trend and might not emerge as a core player. The return on investment for ARM is in the hands of other players, which might deter impatient investors in the long-dormant IPO market.
SoftBank: Accelerated Revenue Growth
Sources informed the media that last month in Cambridge, UK, Arm told investment bank analysts that after adopting new chip technology, it would raise patent fees for smartphone companies by about 40%, accelerating their revenue growth in the coming years.
Arm executives informed analysts that with technological advancements, they can now charge higher licensing fees, rising from about 2.3% to 3.2%. Insiders say that Arm has secured over 80% of its patent fee revenue up to the fiscal year 2026, further boosting its profit growth.
Goldman Sachs and Jefferies project that by the fiscal year 2026, Arm's sales will surpass $4 billion, a growth of over 56% from the fiscal year 2023. This growth in patent fees will help Arm's revenue growth rate return to levels similar to the fiscal year 2022, when revenue increased 33% YoY.
Increasing Revenue Pressure on Arm
However, many investors seem skeptical of Arm's optimistic revenue projections.
According to financial reports released by the SoftBank Group, due to factors like a slowdown in smartphone demand, Arm's quarterly revenue decreased by 2.5% YoY to $675 million as of June 30th, with net profits dropping over 50% to $105 million.
For the fiscal year ending in June 2023, Arm's revenue was slightly below $2.7 billion. By this measure, Arm's revenue ranks at the bottom among companies listed on the Philadelphia Semiconductor Index.
Some analysts note that Arm's mid-tier market value gives it a premium over companies like Marvell Technology Group, GlobalFoundries Inc., and Onsemi, all of which have much higher revenues than Arm.
Can Arm Become a Core Player?
Since SoftBank's acquisition, analysts note that Arm has "missed many opportunities" and might remain on the periphery, unable to become a core player.
Arm is betting its post-IPO growth on the booming AI market's "computational race," suggesting that AI developments, like autonomous vehicles, could increase demand for Arm-designed chips. However, Rene Haas, who became Arm's CEO last year, is focusing on advanced computing, especially chips for data centers and AI applications.
Yet, Arm admits that its CPU chips aren't best suited for the latest AI algorithms. Its design prioritizes speed and simplicity over raw processing power. This focus on low cost, low power consumption, and efficiency has allowed Arm to quickly gain a dominant position in the mobile chip market.
One of the UK's most prominent tech investors, James Anderson, believes that Arm has missed out on several areas, including cloud computing. He's uncertain if Arm will play a pivotal role in the expanding era of AI and doesn't see it having a unique advantage in AI development.
