How to Value SoftBank’s Semiconductor Arm IPO Among the NVidia and AI Frenzy

The much-anticipated IPO for SoftBank Group Corp. semiconductor unit Arm was filed Monday. With the AI frenzy Softbank is looking to time the listing to perfection. In what has been a rather dour few years for IPOs with high interest rates and a bear market for much of that period this is expected to be the year’s largest US initial public offering. Arm Holdings Ltd. didn’t disclose proposed terms in its filing Monday with the US Securities and Exchange Commission. Softbank plans to start its roadshow the first week of September and price the IPO the following week, seeking to be valued in the listing at $60 billion to $70 billion Bloomberg reported.

Next-Generation Automotive Solutions on Arm-Based Microcontrollers

What is Arm Holdings?

Arm is based in Cambridge, UK. SoftBank Group Corp. agreed to buy ARM Holdings Plc for 24.3 billion pounds ($32 billion) back on Monday, July 18, 2016.

“Arm is defining the future of computing. A future built by one of the most successful technology ecosystems in the world. A future built on Arm. We fueled the smartphone revolution and now we’re redefining what’s possible in cloud computing, transforming the automotive industry, enabling a thriving IoT economy, and making the metaverse a reality.” via Arm Website

Its technology is used in almost every smartphone, Arm sells the blueprints needed to design microprocessors, and licenses technology known as instruction sets that dictate how software programs communicate with those chips. It is said ‘the power efficiency of Arm’s technology helped make it ubiquitous on phones, where battery life is critical.’

Rene Haas took over as Arm’s CEO last year, is aiming to expand beyond the smartphone market, which has stagnated in recent years with saturated supply. Advanced computing, particularly the chips for data centers for cloud computing and artificial intelligence applications is the target. This would improve margins as processors for that market are among the most profitable in the industry.

There is also a captive customer base already, Inc. uses Arm-based chips for its Amazon Web Services and are used by 40,000 AWS customers. Energy efficiency is one of the massive plusses for Arm chips.

The filing confirms that Arm saw its revenue decline about 1% in its last fiscal year. Its sales fell to $2.68 billion for the year ended March 31, according to the filing, which is still subject to change.


The offering is being led by Barclays Plc, Goldman Sachs Group Inc., JPMorgan Chase & Co. and Mizuho Financial Group Inc. The filing lists 24 other underwriters below that top tier.

Arm plans for its shares to trade on the Nasdaq Global Select Market under the symbol ARM.

SoftBank will remain the controlling shareholder of Arm after listing, according to the filing. SoftBank bought substantially all of the Vision Fund’s holding of 25% in the company at a $64 billion valuation earlier this month. It could mean it may be seeking to raise less than the $8 billion to $10 billion originally expected from the IPO.

The bank had tried to sell it to NVidia but was blocked by antitrust and we have since had stock market collapses such as the Covid market collapse and the carnage of the past two years. However, this year we have seen AI mania which has seen NVDA rise four times in price.

Largest IPOs

The float will likely be the largest in the US since electric-vehicle maker Rivian Automotive’s $13.7 billion offering in October 2021. The largest tech industry’s IPOs were Alibaba Group Holding Ltd.’s $25 billion 2014 offering and 2012’s $16 billion Facebook (Since rebranded as Meta Platforms) listing.

What is Arm’s Valuation?

With IPOs it is really all about timing. For Arm it’s really about the artificial intelligence mania, isn’t priced in. Bloomberg reported in the past Arm was seeking valuations between $60 billion and $70 billion. SoftBank bought Vision Fund’s holding of 25% in the company at a $64 billion valuation earlier this month.

It is difficult to compare given the stock markets have rallied hard in 2023, particularly Nasdaq technology and AI is the current hype. This makes comparisons difficult, remember it is all about timing. Given that it is hard to compare valuation from smaller Arm competitors such as Synopsys Inc. and Cadence Design Systems. Using the price-to-sales ratios of those public companies for Arm would imply a value of between about $32 billion and $43 billion for the chip designer. Bloomberg based this on the $2.68 billion of revenue from Arm’s latest fiscal year. A representative for Arm declined to comment.

With this as a base you can see how much faith Softbank is putting in the thirst for chips and AI.

Analysts at Bernstein Research in a July 23 note said Arm is the clear market leader in the market for semiconductor design. They put a valuation of the company around $40 billion where “could be upside” to that valuation on “the potential for more significant growth based on future AI applications and further profitability improvements”.

Arm generates cash by charging chipmakers royalties for its semiconductor designs, this makes valuations difficult. The AI frenzy has seen Nvidia Corp. and Advanced Micro Devices have some of the highest valuations in the Nasdaq 100 index, based on share price relative to past earnings. The AI boom has seen Nvidia surge 220% this year, adding about $800 billion in value.

It is the future however that investors are buying these names. When you push out to prospective future earnings these ratios come in accordingly. Bloomberg analysis uses an average blended forward price-to-earnings ratio across Nvidia, AMD, Synopsys and Cadence. ‘With that Arm would need to generate $1.1 billion of income to justify a $40 billion valuation or around $1.7 billion for a $64 billion value.’

The risks are obvious,

What happens if the AI mania, is that a mania and overhyped?

What of the high inflation causing a sales slump?

What of the buildup of excess inventory, especially in the smartphone market.

A metric Wall Street has been modeling is using the market value of Arm compared to the cash flow it generates. That is the cash flow from its operations after necessary capital expenditure.

SoftBank founder Masayoshi Son will be white knuckling the IPO. His Vision Fund lost a record $30 billion last year.

If successful, and assuming the Nasdaq hasn’t fallen totally out of bed other held back IPOs such as online grocery delivery company Instacart Inc. and marketing and data automation provider Klaviyo will likely try to list.

This is not investment advice. Look at the success or lack of the previous similar IPOs from listing to drawdown. Understand the beta risk to the stock market and to growth stocks. Note in particular the risks listed above. Interesting times for not only Arm but the stock market.

Source: Bloomberg, Arm

From the TradersCommunity Analysis Desk