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Arm's $52 billion IPO: As sales fall, RISC-V rises, will the fizz last?

"SoftBank, you know, is not known as a poster child for good corporate governance"

ARM IPO valuation risks

In brief: Arm IPO priced at $51/share. Values company at $54 billion. SoftBank to retain 90% of shares. Revenues fell last year. Notable risks include exposure to China and the rise of the open source RISC-V architecture.

Arm sold more than 95.5 million shares at $51/share – the top end of earlier guidance – through its initial public offering (IPO),  giving it a valuation of over $54 billion as it readied for public trading on the Nasdaq later today, according to a statement early on Thursday.

That’s a 20X multiple of annual sales, which are falling.

The Britain-born, Japan-owned (SoftBank is retaining 90% of shares) chip design firm reported a 1% decrease in revenue to $2.6 billion and a 5% fall in net income to $524 million for the year ended March 2023.

Arm IPO valuation: China a big risk?

Arm also revealed that 24.5% of sales are to independent entity “Arm China,” which has suffered serious governance issues, making it the company’s largest customer at a time of heightened geopolitical risk.

Yet Arm, which has approximately 6,000 staff, sees a total addressable market of $202.5 billion – with more than 30 billion Arm-based chips reported as shipped in the fiscal year ended March 31, 2023.

The company’s share of the cloud computing silicon market is also growing. Arm’s market share in the cloud has grown from 7.2% as of December 2020 to 10.1% as of December 31, 2022 it said – claiming the cloud computing chip market will be worth some $28.4 billion by 2025.

Soaring costs for sophisticated chip design and a growing trend by OEMs to design custom chips in house for improved performance or efficiency are all tailwinds, the company held in its prospectus, pointing to examples like AWS’ evolving family of “Graviton” cloud compute instances.

See also: NVIDIA promised to protect Arm's open licensing model for just 5 years, warns CMA

Many are wary: “SoftBank, you know, is not known as a poster child for good corporate governance,” Jamie Halse, Portfolio manager at Platinum Asset Management, told CNBC: “So, going into an IPO where SoftBank owns 90% of the company you’re buying into, I’d be cautious.”

Other risks for investors are clearly spelled out in Arm’s own prospectus.

Among the most notable, in The Stack’s view: “We face significant competition from established technologies such as the x86 architecture, as well as from free, open-source technologies, including the RISC-V architecture. Many of our customers are also major supporters of the RISC-V architecture and related technologies", it notes.

“If the RISC-V architecture and related technologies continue to be developed and market support for RISC-V increases, our customers may choose to utilize this free, open-source architecture instead of our products… x86 and RISC-V architectures have business models that are different from ours and may be more attractive to our customers…”

Arm noted that in August 2023 “a group of our customers and other competitors announced a joint venture aimed at accelerating the adoption of RISC-V” – referring to a a new EU-based joint endeavor to pioneer fully certified RISC-V-based IP and architectures, initially for the automotive industry and backed by Qualcomm, NXP, Bosch and others.

That’s just the latest sign of how seriously European industry and policy makers are taking aspirations of technological “sovereignty” with another project called RISER announced in early 2023 aiming to develop the “first all-European RISC-V cloud server infrastructure."

There is a mighty long way to go before RISC-V fully challenges Arm and European Commission-funded research projects rarely turn into commercial powerhouses. Arm offers, as its prospectus notes “the most popular and pervasive” CPU and associated instruction set architecture (ISA) in history, but the risks are real and the valuation is arguably bullish.

Bloomberg reports that the IPO was 10X oversubscribed.

Time will tell whether prospective investors lost and if so, how badly.

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