he came out of the gate swinging. Shares opened at $56.10 Thursday afternoon and continued to climb.
The opening price is 10% higher than the U.K.-based company’s initial public offering price of $51 per share, which was at the top of its expected range of $47 to $51 and gave the company chip design a valuation of $54.5 billion on a fully diluted basis. .
Arm (ticker: ARM) is worth $59.9 billion based on that opening price.
In the first hour of trading, Arm shares rose as high as $61.99, nearly 22% higher than the IPO price.
Arm supplies chip designs to a wide range of semiconductor manufacturers, including processor designs used in essentially all current smartphones. Arm doesn’t make chips.
bought Arm for $36 billion in 2016; an agreement to sell the company
(NVDA) of $40 billion in cash and stock collapsed in 2022 after stiff regulatory opposition. SoftBank will own about 90% of the shares once the deal is completed. The stock will trade under the symbol ARM.
Arm reported revenue for the March 2023 fiscal year of $2.679 billion, down from $2.703 billion, in a weak market for smartphones, which account for the bulk of the company’s royalty revenue. Net income for the year was $524 million, down from $549 million in fiscal 2022.
In an interview with Barron’s, Jason Child, Arm’s chief financial officer, said last fiscal year’s stable revenue was no surprise and followed outsized growth the previous year, when some customers ramped up their licensing business when it looked like Arm would be acquired by Nvidia. He said it makes more sense to look at the company’s average three-year revenue growth, around 15%, as a better rough measure of Arm’s likely growth rate going forward.
If prices hold when trading begins Thursday, the deal would be a big win for SoftBank Group, which has struggled with losses in its Vision Fund venture portfolio in recent quarters. SoftBank has not commented on how it plans to spend the IPO proceeds, but founder and CEO Masayoshi Son recently said the company plans to get more aggressive on AI-related investments.
SoftBank’s large position in the stock could become an overhang on Arm’s stock price if the market starts to worry about the company liquidating its stake in Arm; the company has said nothing about how long it will hold the position or whether it might possibly reduce it. SoftBank has a long history of gradually selling off parts of its large investments, as it did with its once-disproportionate position in the
Before the IPO, SoftBank bought Vision Fund’s 25% stake in Arm for $16 billion, valuing the company at $64 billion, or double what SoftBank originally paid for Arm. Under the agreement between the company and the Vision Fund, the $16 billion will be paid in installments over a two-year period. If the stock falters, SoftBank could be seen as overpaying its venture fund investors for the biggest share, but if Arm’s price appreciates over the next couple of years, the transaction could look like a smart move for investors of the SoftBank Group.
According to the company’s IPO prospectus, a group of major technology companies it includes
(TSM) have expressed interest in purchasing up to $735 million of the offering at the IPO price.
On Wednesday, New Street Research analyst Pierre Ferragu resumed coverage of Arm with a buy rating and a $59 price target. He estimates Arm will be worth $82 billion in 2026, based on a multiple of 27 times royalty revenue and 40 times pre-tax earnings, with royalty revenue growing annually on average during that period.
While Arm’s 2022 revenues remained stable compared to 2021 amid a downturn in the mobile market, Ferragu believes the company can grow at least by double digits on average over the next five years. And it believes pre-tax profits could triple over the same period, given the minimal costs of raising revenue.
On the other hand, said Paul Meeks, technology fund manager at Independent Solutions Wealth Management Barron’s which believes the proposed valuation of Arm shares appears “heavily forced,” about 20 times lower than annual sales and nearly 100 times higher than profits. He says the valuation is unusually aggressive for a company that showed no growth in its last fiscal year.
Meeks also sees risks in the company’s exposure to China, which accounts for about a quarter of the company’s revenue.
In an interview with CNBC, SoftBank founder Masayoshi Son said he intends to keep most of his stake in Arm for as long as possible and that he would prefer not to sell any part of the company.
Child says the decision to go public reflects the company’s need to be able to compete for engineering talent with other chip companies. “Not having public currency to align engineers with our shareholders has been a challenge,” Child said. “That was the focal point.”
Write to Eric J. Savitz at email@example.com