Shares of Arm, the British chip design company founded in 1990, will trade in New York for the first time after it was acquired by SoftBank in 2016. Arm licenses its own chip designs to major semiconductor companies and device makers such as Apple and Nvidia. The company charges its customers an upfront fee and a percentage of sales per unit sold. With the IPO expected to value Arm at up to $54.5 billion, investors are debating whether to buy shares when trading begins on September 14. Analysts have expressed both optimism and caution about Arm’s growth prospects and valuation. Most analysts believe Arm is benefiting from strong secular demand trends in artificial intelligence, data centers, and the automotive and Internet of Things markets. However, they also note risks from competition such as RISC-V, an open standard chip architecture and customer concentration, with the top five customers generating more than 50% of revenue. The loss of any of these customers could have a material impact on revenue. China risks Analysts have also noted Arm’s limited control over its Chinese joint venture Arm China, which accounts for 24% of sales. “Arm’s somewhat black-box relationship with Arm China increases execution risk,” Roth MKM’s Rohit Kulkarni said in a Sept. 1 note to clients. “In addition, Arm can only sell to Chinese customers through the Arm China channel, and they can offer competitive products. Because they have no direct interest in Poor China, they currently have very little control over their only means of selling into China.” Arm has admitted in its filings that there are “significant risks” to its operations as a result of its presence in China. Valuation analysts at New Constructs have also questioned Arm’s valuation. They suggest that SoftBank, Arm’s owner, has inflated the company’s value through its own investments. SoftBank acquired 25% of the Arm shares it did not directly own from the SoftBank Vision Fund, which it partially owns and operates on behalf of other investors. “We think it’s fair to say that the nearly $49 billion valuation is based more on SoftBank’s actions in the private markets to manipulate the valuation higher than on the company’s fundamentals,” New Constructs analysts said in a scathing note to customers. Growth analysts at Bernstein were also cautious, expecting cloud, automotive and mobile royalties to drive healthy revenue growth for Arm. “We have increased our total revenue in 2022-2033 [compounded annual growth rate] from 8% to 11%, driven entirely by an increase in royalty revenue growth,” Sara Russo said in an Aug. 31 note to clients. Russo increased her valuation for the company from $40 billion to $46 billion, although this is still below $40 billion. the Arm valuation expectation of up to $54.5 billion. Russo also pointed to Arm’s decline in profitability in 2022 as a worrying sign that margin recovery could take longer than expected. “We believe this can be understood as R&D spending being primarily driven by personnel costs, spending that is difficult to flex in the face of cyclical market downturns such as those we are currently experiencing in the mobile sector,” she added. Redburn Atlantic’s cost control analysts said Arm’s revenue forecasts call for rapid royalty increases and tight cost controls beyond any previous precedents. That led analyst Timm Schulze-Melander to model slower growth than Arm’s target of 20-25% royalty CAGR (compound annual growth). Schulze-Melander also believes Arm will struggle to reduce costs as it promotes a new design during an industry downturn. In 2021, the company announced its ARMv9 Instruction Set Architecture (ISA), which will help semiconductor manufacturers to make chips for the data center, a new growth segment for Arm. “Taken together, selling the v9 ISA and supporting customers to bring v9 products to market could mean operating costs become more difficult to control than we currently predict,” he added in a note to clients on September 11. – CNBC’s Michael Bloom contributed to this report.
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