As British chip designer Arm prepares to raise about $5 billion in an initial public offering (IPO) on Thursday, its China business has become a serious point of concern.
The SoftBank-owned firm used many pages of its IPO prospectus to warn investors of risks related to its exposure to China at a time of rising tension between Washington and Beijing over chip technology.
Its regulatory filing last month revealed that a quarter of its sales come from China, through an unusual relationship with an entity it does not control and with which it has a complex history.
Arm China is “an entity that operates independently of us and is our single largest customer,” the company said in its prospectus. “Neither we nor SoftBank Group control the operations of Arm China.”
Concerns about China are likely to have been “built into IPO pricing expectations already, although a worst-case scenario of increased US sanctions [or] trade restrictions probably is not,” Kirk Boodry, an investment advisor at Astris Advisory, a Japanese investment research firm, told CNN.
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.
Here’s another sign of growing confidence in the stock market and the broader U.S. economy: Companies from Birkenstock to Instacart are getting ready to go public through IPOs after a long lull in high-profile listings.
First up is chip designer Arm Holdings, which is set to make its debut on the Nasdaq on Thursday. It priced its shares at $51 each, which would value the company at almost $55 billion.
Arm may not be a household name, but it’s a multi-billion-dollar tech company that designs many of the high-end microchips that power smart phones and supercomputers.
IPOs dried up last year, amid fears the Federal Reserve’s aggressive interest hikes would spark a recession
And the drought has continued in 2023. There have been just 17 new listings on the New York Stock Exchange, for example. Last year, there were 24. In 2021, there were almost 300.
Other companies are expected to follow in Arm’s footsteps with public listings, including the grocery delivery company Instacart and the German sandal maker Birkenstock.
Arm designs and licenses advanced semiconductor technology that powers many of the world’s electronic devices. From smartphones to video game consoles to servers, Arm estimates that 70% of the world’s population uses products powered by its chips. It has become a market leader, with customers including Nvidia, Apple, Samsung and Qualcomm.
An extra 7,000,000 in American depositary shares has been made available in Arm’s IPO by sole owner Japanese conglomerate SoftBank to offset over-allotment.
Its public listing on the Nasdaq Global Select Market is planned to finish on 18 September. AMD, Google, Apple and Nvidia are all firms that are expected to invest at the time of Arm’s listing