Title: Softbank Adjusts Arm IPO Valuation, Raises Questions About Future Prospects
Softbank, the parent company of Arm Holdings, has recently revised the initial public offering (IPO) valuation of the British semiconductor designer. Previously estimated to be in the range of $60 billion to $70 billion, the new valuation now stands at $50 billion to $55 billion. This adjustment has raised concerns about the future success of Arm and its potential investors.
At the previously estimated upper range of $70 billion, Arm’s trailing 12-month price-to-earnings (PE) ratio was in the triple digits. However, with the revised valuation, the PE ratio now dips into the single-digit range, though still at a lofty 95-times valuation. In terms of price-to-sales, the previous valuation would have given Arm a revenue multiple of 26x, while the revised valuation brings it down to a more moderate 18x revenue multiple.
Despite the downward revision, this new target still represents a significant valuation premium, although not as substantial as cornerstone investor Nvidia’s. It is worth noting that SoftBank purchased the remaining 25% stake in Arm from its Vision Fund unit for $64 billion in August, signaling a step back from the initially touted valuation of $70 billion.
This adjustment raises the question of whether the valuation could drop further. Some speculate that SoftBank is simply trying to engineer a favorable price for the IPO, hoping that Arm’s shares will appreciate after the listing, thus pleasing investors and enhancing its public image. On the other hand, it could also be seen as a realistic reassessment of expectations following concerns outlined in Arm’s IPO filing with US regulators.
Arm, while optimistic about its future role in the artificial intelligence revolution, faces challenges. Its general-purpose central processing unit (CPU) designs, though widely used in smartphones, are not as suitable for the large data centers that power AI. The company itself acknowledges this limitation, stating that new technologies, such as AI and ML (machine learning), may use algorithms that are not suitable for a general-purpose CPU, such as our processors.
Another concern lies in the fact that a quarter of Arm’s revenues come from China, a nation facing potential technology sanctions and increasing restrictions. However, it is important to note that this issue extends beyond Arm to the entire microchip supply line.
A source involved in the impending IPO has revealed that preliminary meetings with investors have been positive. It is common for dealmakers on major tech listings to start roadshows with a conservative price range as a tactic to build momentum. The roadshow is an opportunity for potential investors to gain insights into the company and its future prospects.
In summary, Softbank’s decision to adjust Arm’s IPO valuation has generated questions about the semiconductor designer’s future success. While the revised valuation still represents a significant premium, concerns about Arm’s role in AI and its heavy reliance on China’s market must be considered. As the IPO roadshow begins, investors will closely scrutinize Arm’s potential for growth and profitability.
