Computer chip designer Arm plans to complete its long journey to an initial public offering later this week. Other tech companies looking to go public will be closely watching the Arm IPO.
The Arm IPO will test investor appetite for new issues, market watchers say. Other tech IPOs waiting in the wings include grocery delivery platform Instacart and cloud software provider Klaviyo.
Cambridge, U.K.-based Arm intends to sell 95.5 million shares priced between $47 and $51. That would translate to a valuation for Arm of $50.2 billion to $54.5 billion.
Arm was publicly traded from 1998 to 2016 when Japan's SoftBank purchased the firm for $36 billion.
Graphics-chip maker Nvidia tried to buy Arm in 2020 for $40 billion in cash and stock but abandoned the deal in 2022 because of regulatory challenges in the U.S. and Europe.
Arm IPO Has High-Profile Backers
Arm plans to go public for a second time with the backing of a who's who of tech giants that use its technology. It will trade as American depositary receipts on the Nasdaq exchange under the ticker ARM.
The Arm IPO is expected to start trading on Thursday. Tech leaders and Arm customers Alphabet, AMD, Apple, Nvidia and others have indicated interest in purchasing Arm shares at the IPO.
Proceeds of the offering will go to Arm owner SoftBank, which will continue to own 90% of the company after the IPO. Softbank could raise up to $5.16 billion from the Arm IPO.
The Arm IPO is "going to be one of the biggest IPOs in the last year," Doug Clinton, managing partner of Deepwater Asset Management, in a blog post.
He added, "Investors are starting to think about what that means for the broader IPO market: Is the window open for tech companies to go public again?"
However, Arm is a mature, slow-growth company, he says. So, the planned IPOs of venture-backed companies Instacart and Klayvio will be a better indication of whether the IPO window is truly open again, Clinton said.
Arm Stock Pros And Cons
Investors in the Arm IPO will be weighing some major pros and cons associated with the company.
On the plus side, Arm has built a highly profitable business with dominance in the mobile device market. It has over 99% of the smartphone market, but lags in the fast-growing cloud computing market, with just 7% share.
Arm's revenue dipped a fraction to $2.68 billion in its fiscal 2023 ended March 31, amid weak smartphone sales. Arm's chip designs also are used in automotive, industrial, Internet of Things and other applications.
The company's business model generates software-like gross profit margins near 96%.
Arm currently gets 63% of its revenue from royalties and 37% from licensing. Royalties enable Arm to get a payment per chip sold. Licensing involves giving customers access to its portfolio of intellectual property for developing Arm-based processors.
Arm's Largest Market Has Stalled
"However, the company's largest end-market, mobile handsets, is now ex-unit-growth with limited opportunities to expand the royalty rate per device," Susquehanna Financial Group analyst Christopher Rolland said in a report.
Smartphone unit sales fell nearly 12% in 2022 and are forecast to fall again this year, he says.
"Overall, market expectations for handset unit growth over the coming decade are muted as the market is largely penetrated with no large catalysts," Rolland said.
Arm is trying to diversify its revenue base, including moving into the artificial intelligence market. But AI will be a tough market for Arm because AI is focused on data centers, not computing devices on the edge of networks where Arm plays today, analysts say.
Still, "Softbank is hoping the enthusiasm in AI will spill over into the Arm IPO," Daniel Morgan, senior portfolio manager for Synovus Trust, said in a note to clients.
RISC-V Poses Risk To Arm
Meanwhile, Arm faces a challenge from free, open-source technology in RISC-V. Like Arm, RISC-V is based on "reduced instruction set computer" designs. RISC-V has been drawing the attention of many semiconductor companies looking for an alternative to Arm, analysts say.
"The growing adoption of RISC-V chip architecture is the biggest risk for Arm," Albie Amankona, an analyst at global research firm Third Bridge, said in a report. "RISC-V is already making inroads in mid- and low-end applications, such as the embedded market, including automotive."
Another risk for the Arm IPO is the company's exposure to China, which has geopolitical risks. China contributes about 20% to 25% of Arm's licensing and royalty revenues.
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