To The Moon

Chip design giant Arm is about to launch IPO!

The company has attracted much attention from investors, for one thing, Arm is the dominant chip IP in the mobile Internet era, and 99% of the world's smart phones use its chip architecture;

Secondly, Arm will hold the world's largest IPO this year, and tech giants such as $Apple(AAPL)$ $Alphabet(GOOG)$ $Alphabet(GOOGL)$ $NVIDIA Corp(NVDA)$ $Intel(INTC)$ $Taiwan Semiconductor Manufacturing(TSM)$ will subscribe for up to $735 million of Arm shares at the IPO price.

According to the prospectus, Arm will issue between $47 and $51, offering a total of 95.5 million ADS, raising $4.87 billion, and the market value of up to $52.3 billion.

Previously, $NVIDIA Corp(NVDA)$, the king of AI, wanted to spend $40 billion to acquire Arm, but due to the opposition of a number of industry giants, coupled with regulatory concerns about suspected monopoly, the acquisition eventually failed.

Now, more than a year has passed, Arm plans to land in the US stock market at a valuation of $52.3 billion. is it expensive? Is it up or down on the first day of trading?

This article sets aside the fundamentals of Arm for a moment and just talks about trading value!

First of all, Arm used to be a public company and was taken private by SoftBank in 2016. Before delisting, Arm's price-to-sales valuation was between 14-20 times:

For fiscal year 2023 (the year ended March 31), Arm's revenue was $2.679 billion, which means its price-to-sales ratio is estimated at 19.5 times.

Is that a fair valuation?

In terms of revenue growth, the compound growth rate of Arm fiscal year 2021-2023 is 15%, which is similar to the growth rate before delisting:

From the perspective of profitability, although the gross profit margin of the fiscal year 2023 was as high as 96%, a record since the financial data were available, it was only 0.1% higher than that of 2015, and the net profit rate of the fiscal year 2023 was only 19.6%, which was significantly lower than before privatization:

The main reason for the decline in profit margin is that Arm has increased its R&D investment in the past two years, and the R&D expense rate in the fiscal year 2023 was as high as 42.3%, which is much higher than the history and much higher than other semiconductor companies:

In this way, it seems that Arm is not better than before privatization, but the 2023 fiscal year is just the cyclical low point of the semiconductor industry. With signs of improvement in industry demand, industry giants generally expect that 2024 will usher in a semiconductor upward cycle, Arm revenue growth is expected to increase.

In addition, Arm's R&D expense rate has huge room to decline. If it drops to the industry average of 14%, it means that Arm's net profit margin may be as high as 50%!

Generally speaking, the higher the profit margin of the company, the higher the valuation of the price-to-sales ratio. Although in the long run, Arm's valuation is profitable, it has to be said that the decline in expense rate takes time. From this point of view, SoftBank as an investment institution, is very smart, almost adhere to the valuation ceiling to price, leaving not much meat for the secondary market.

However, the probability of Arm rising on the first day of the listing is still large, mainly because the shares issued by Arm are only 9.4%, SoftBank is expected to have about 90.6% of the outstanding shares of Arm after the completion of the IPO. Excluding the shares subscribed by the cornerstone, the actual liquidity is not large, and it is not excluded that the funds will push up the stock price.

Overall, Arm is the world's largest IPO project, but the party only belongs to SoftBank, and other investors can only have a sip of soup!