Arm Holdings’ parent company Softbank has purportedly adjusted the British semiconductor designer’s IPO valuation down to the $50-$55 billion range, from the previously touted $60 billion-$70 billion range.
Softbank’s initial upper-range target of $70 billion put a triple-digit price-to-earnings ratio on Arm on a trailing 12-month basis (as of the latest financial statement).
Under a $50 billion valuation, Arm's PE ratio on a trailing 12-month basis dips into the single digits, albeit at a still very loft 95-times valuation.
On the price-to-sales front, assuming a valuation of US$70 billion would give Arm a revenue multiple of 26x given its US$2.68 billion in revenues in the last financial year.
For the record, Intel’s and AMD’s revenue multiples are both less than 10.
Revising the valuation down to $50 billion gives a more modest 18x revenue multiple.
Make no mistake: This downwardly revised target still represents a big valuation premium. Not as big as cornerstone investor Nvidia, but still big.
It is worth noting that, despite SoftBank’s long-touted $70 billion valuation for Arm, it bought the remaining 25% stake in Arm from SoftBank’s Vision Fund unit on a $64 billion valuation in August.
From $70 billion, to $64 billion, now to $50 billion… Could it drop further still?
Why the revaluation?
The cynic might suggest that SoftBank is simply engineering a good price for the IPO in hopes that Arm shares will go up post-float, pleasing investors and making themselves look good in the public eye.
On the other hand, it could be more of a rebasing of expectations given the numerous concerns flagged in Arm’s IPO filing with the US regulators.
Let’s not forget that Arm’s revenues actually fell in the financial year ending March 31, from $2.7 billion to $2.68 billion.
Arm reckons it can play a central role in the artificial intelligence revolution, but in reality, its general-purpose central processing unit (CPU) designs, though ubiquitous in the smartphone space, are not suited to the massive data centres powering AI.
Arm itself conceded 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”.
Lastly, a quarter of Arm’s revenues come from China, a country where technology sanctions hang in the balance and could get even stricter down the line.
In fairness, this is a problem for the microchip supply line as a whole, not just Arm.
A person involved in the pending IPO told the FT that preliminary meetings “testing the waters” with investors had gone well and that it was a common tactic for dealmakers on large tech listings to start roadshows with a conservative price range to help build momentum.
Let the roadshow begin...