Pop! Few events in financial markets this year were as hotly anticipated as the listing on September 14th of Arm, a British chipmaker whose designs are found in nearly every smartphone. The debut, on New York’s Nasdaq stock exchange, was a resounding success. The share price climbed by 25% on the first day of trading, giving the firm a market value of $65bn. That is $34bn more than SoftBank, a Japanese investment group, paid for the firm in 2016, $25bn more than Nvidia, an American chipmaker, offered to pay in 2020, $1bn more than the valuation at which SoftBank shuffled a 25% stake from its investment fund to its main operation in August, and 125 times Arm’s profit last year.
Arm’s initial public offering (IPO) is America’s biggest since Rivian, a startup that makes electric trucks, raised $14bn in November 2021. New listings dried up shortly thereafter. Many have been counting on Arm to break the spell. Its successful opening day will lift the spirits of Birkenstock, a German sandal-maker which on September 12th announced plans to list its shares in America, and Instacart, a grocery-delivery firm looking to raise $600m this month.
Some investors had feared that Arm might flop, which is understandable, given how devilishly difficult the firm is to value. Arm’s bosses and bankers have convinced investors that it can juice the royalties its customers pay to use its designs, offsetting the effect of the worldwide slump in smartphone sales currently under way. Arm’s new shareholders appear to have also shrugged off two wider worries confronting markets: the risk of doing business in China, and the excesses of investor enthusiasm for all things artificial intelligence (AI).
To believe Arm is fairly valued is to believe that the pages of China-related risks in its IPO prospectus are conservative legalese, rather than an ominous premonition. Last year a quarter of the firm’s revenue came from China. Trade restrictions and RISC-V, an open-source alternative to Arm’s technology popular in China, could nibble away at these sales. The governance of the company’s operations in China adds to the worry. The majority of Arm China, which licenses Arm’s products in the country, has been sold to Chinese investors, meaning neither Arm nor SoftBank retains control. Issues are already emerging, including a history of late payments disclosed in the company’s prospectus (in March 40% of Arm’s accounts receivable were owed by Arm China). If relations between America and China deteriorate further, the arrangement may become problematic.
Arm, like many other firms, has been busily trying to present itself to investors as a bet on AI. That is unsurprising, given how this year’s buzz around the technology has fuelled extraordinary stockmarket gains for its early adopters. Yet it may be some time before AI starts to fatten Arm’s bottom line. “It’s a bit early to call where AI computing workloads are going to sit. If they end up in our phones, that could drive more demand for Arm’s products,” says Sara Russo of Bernstein, a broker.
Some of the biggest names in tech, including Apple, Google and Nvidia, whose AI chips pushed it into the trillion-dollar tech club this year, were part of an exalted list of ten “cornerstone” investors that lined up to purchase $735m of Arm’s shares as part of the listing. Announcing buyers ahead of an IPO can inspire confidence and reduce price volatility. Usually, however, these are financial investors. Rarely, as in this case, are they customers. For Arm, having some of tech’s biggest names on board is a vote of confidence. For the giants, it affords them a chance to get a foot in the door of a company vital to the tech industry.
Investing in a SoftBank-backed IPO is a triumph of hope over experience—some of its biggest investments have gone on to flop in the public markets. What’s more, the investment group still holds around 90% of Arm’s shares, which means it will continue to call the shots. The incentives of SoftBank and Arm’s new investors are not certain to align, especially when it comes to future share sales. These could dampen Arm’s price by increasing supply, though SoftBank isn’t thought to be in a hurry to fully exit its investment. Arm’s new shareholders have, in other words, hitched themselves to a controlling owner whose behaviour is harder to predict even than what Arm is really worth. ■
Source: Business - economist.com
