ARM Holdings, the chip designer and parent company of SoftBank Group, has recently gone public with its initial public offering (IPO). However, there are concerns about whether ARM can justify its high valuation against competitors like Nvidia and AMD.
The IPO saw ARM sell about 10% of its shares for $51 each, which was at the top end of the expected range. The stock opened at over $56 and reached as high as $66.28 on its first day of trading. This initial enthusiasm seemed overblown, considering that the rest of the semiconductor industry has been facing declines since August.
ARM’s valuation is already expensive at $51 per share. On the second day of trading, the stock reached $69 before closing at $60.75, almost 12% below its high for the day. As of now, ARM is trading at around $58.
ARM is currently being valued at roughly 25 times its revenue from the previous year, which is a significant multiple. Approximately 45% of its revenue still comes from sales to mobile phone producers or chip producers supplying smartphone makers. However, this part of the business is in decline. To demonstrate sales growth as a public company, ARM will need to quickly expand into new areas, like artificial intelligence.
This is not ARM’s first time as a publicly traded company. It was founded in 1990, went public in 1998, and was later acquired by SoftBank in 2016. There was a deal in place to sell ARM to Nvidia, but it fell through due to regulatory issues.
In comparison to competitors like Nvidia and AMD, ARM’s valuation seems disproportionately high. Nvidia currently trades at 41 times forward earnings and 106 times trailing earnings, while AMD trades at 37 times forward earnings and 40 times trailing earnings. ARM, on the other hand, trades at 155 times trailing earnings. Additionally, Nvidia trades at 33 times trailing 12-month sales, while AMD trades at only eight times trailing 12-month sales.
Given these factors, it is questionable whether ARM can compete with Nvidia and AMD in terms of valuation. ARM’s revenue is stagnating, and its AI-related sales are still in the planning stage. Meanwhile, Nvidia and AMD have already established themselves in various markets and have finished AI-related products ready for release.
There are concerns about the sustainability of ARM’s valuation, especially considering SoftBank’s potential for using the stock as a source of cash through secondary offerings. While some analysts may be optimistic about ARM’s future, others remain skeptical. It remains to be seen whether ARM can live up to its high valuation and prove itself in the market.
Investors will need to closely watch ARM’s performance before making any decisions. The stock’s current trajectory suggests caution, and it may be wise to wait and see how it trades before making any investment choices. ARM will have to demonstrate its capabilities and potential growth as a public company before it gains the trust of skeptical investors.
Overall, the question remains: Can ARM Holdings truly justify its valuation against competitors like Nvidia and AMD? Only time will tell.
