Arm’s IPO Could Have Broad Reach
By Greg Kahn
Emerging Tech Exchange
Founder & CEO
Published on September 12, 2023
Computer chip designer Arm’s upcoming IPO is likely to have a significant impact on tech stocks. It could even (don’t excuse the pun) offer a shot in the arm for companies that have been pulling back on their IPO plans.
Several key factors make Arm's IPO particularly noteworthy. Here’s why the company should exceed expectations:
High Valuation with Tech Giant Backing: Arm's valuation, ranging from $50.2 billion to $54.5 billion, reflects investor confidence in the company's technology. Notably, Arm has secured support from tech giants like Alphabet, AMD, Apple, and Nvidia, all of which have expressed interest in purchasing Arm shares. This high-profile backing can boost investor confidence and drive demand for Arm's IPO shares.
Strong Profit Margins and Market Dominance: Arm boasts a highly profitable business model, with gross profit margins nearing 96%. The company has established dominance in the mobile device market, holding over 99% of the smartphone market. While its presence in the cloud computing market is smaller (7% share), Arm's track record of profitability is a compelling factor for potential investors.
Positive Revenue Streams: Arm derives revenue from both royalties and licensing. Royalties, in particular, provide a steady income stream, as the company receives a payment per chip sold. This diversified revenue approach mitigates risks associated with fluctuations in the technology market.
SoftBank's Continued Ownership: SoftBank, Arm's owner, will maintain a 90% stake in the company even after the IPO. This not only indicates SoftBank's confidence in Arm's future prospects but also aligns its interests with those of investors, creating stability in the company's leadership.
Market Influence and Tech Industry Importance: Arm's technology underpins a wide range of applications, including mobile devices, automotive, industrial, and IoT. Its influence extends beyond smartphones, making it a pivotal player in various tech sectors.
I’m equally confident that Arm’s executive team can handle the outlying risks pressing in on its IPO plans:
Mature, Slow-Growth Market: Arm operates in a mature and slow-growth market, particularly in mobile handsets. Declining smartphone sales and limited opportunities for expanding royalty rates per device pose challenges for future revenue growth.
Competition from RISC-V: The emergence of open-source technology like RISC-V presents a notable challenge to Arm. RISC-V is gaining traction as an alternative to Arm's architecture, especially in mid- and low-end applications, potentially eroding Arm's market share.
Exposure to China: Arm's significant exposure to the Chinese market (contributing about 20% to 25% of licensing and royalty revenues) exposes it to geopolitical risks associated with China.
All in all, Arm’s got a strong valuation and profitability. Once you factor in the support from tech giants who need its processing power, that market influence positions the company favorably for a successful IPO.
What are your thoughts on the current IPO landscape among emerging and established tech companies looking through the remainder of the year?
Greg Kahn
Emerging Tech Exchange
Founder & CEO
