British semiconductor architect Arm Holdings has taken another step towards its landmark IPO through Monday’s filing with the US Securities and Exchange Commission.
Despite stretching beyond 200 pages, the filing lacked a few important details, first and foremost being the exact size of the flotation.
One thing is for sure: it ain’t gonna be cheap, especially not if industry peer and former takeover hopeful Nvidia Corporation’s valuation is anything to go by.
Arm’s parent SoftBank has long pinned a US$60 billion and US$70 billion price tag on the group.
Interestingly, this puts Arm’s price-to-earnings (PE) multiple on a similar footing to Nvidia.
Doing some napkin calculations, Nvidia’s US$8.36 billion in net income (non-GAAP) in the last financial year against today’s US$1.16 trillion market capitalisation gives the group a whopping 138x PE.
Applying the same multiple to Arm’s US$524 million in non-GAAP income in the last financial year gives the company a US$72 billion valuation, just above the upper range of where Arm sees its worth.
On the price-to-sales front, assuming a valuation of US$60 billion would give Arm a revenue multiple of 22x given its US$2.68 billion in revenues in the last financial year. This is a lot cheaper than Nvidia’s hard-to-justify 42x revenue multiple.
For the record, applying Nvidia’s 42x revenue multiple would give Arm a valuation of US$112 billion; larger than the UK’s sixth-largest company, BP.
Of course, no one is expecting Arm to achieve this valuation, but it gives a good idea of the premium applied to US listings.
Crude though these napkin calculations may be, they also give a sense of New York’s allure for big tech companies, as the world’s most overpriced equities market.
But how much would a US$60 billion Arm valuation consist of an AI-shaped bulking agent?
Arm says it will play a central role in the global transition to AI and machine learning (ML)-enabled computing.
At the same time, Arm conceded that “new technologies, such as AI and ML, may use algorithms that are not suitable for a general purpose CPU, such as our processors”.
Arm, though ubiquitous in handheld consumer devices, is less relevant in the data centre space that is the berating heart of the AI revolution.
“Consequently, our processors may become less important in a chip based on our products, thus eroding its value to the customer and resulting in lower revenue for us,” read the IPO filing.
This may or may not ever happen.
In the meantime, Arm is likely hoping to nab a premium as an AI-adjacent stock.
AI has driven Nvidia’s valuation to stonking new heights in 2023, with shares tripling in value; nearly unheard of for a mega-cap.
Much if not all of this has been down to the central role its GPUs played in the mass adoption of large-language AI models like ChatGPT.
It only stands to reason that Arm should share in some of this goodwill. It will need to in order to justify a PE in the triple digits.
Exactly how much of a premium AI will play on Arm stock will be determined by the markets when the group finally goes public.
On that front, Arm still has yet to disclose a specific timeframe for its pending IPO. Hopefully, the AI bubble won’t burst in the meantime.