The objective valuation of SoftBank, owner of the chip designer, collides with the sector’s forecasts
Tech investors want growth. That’s an opportunity and a headache for bankers hoping to steer chip designer Arm’s IPO, which its owner SoftBank wants to complete by March 2023. Advisers have plenty of material to work with, but not the enough to justify the price expected by the head of SoftBank, Masayoshi Son: 60,000 million dollars.
Son has chosen to take the British company, which licenses chip designs to the likes of Qualcomm, public after regulators scuttled a sale to Nvidia. On Friday, Arm said he had replaced the director of his joint venture China, solving a longstanding governance problem and clearing the way for an IPO. Goldman Sachs, Barclays, JP Morgan and Mizuho Financial this month helped arrange a margin loan against SoftBank’s Arm shares, making them likely candidates to coordinate an IPO.
His job is to convince investors that Arm’s revenue will skyrocket. It’s challenging, as its top line grew at a paltry 4% compound annual rate, in dollars, between 2016 and March 2021, in part due to its reliance on the saturated smartphone market.
Of course, Arm grew 26% faster in the fiscal year through March, according to SoftBank forecasts. The rise of 5G mobile networks increased shipments of Arm-based semiconductors. It also helps that Apple is using the firm to design the chips for its new Mac.
The next chapter could be selling chip designs for cloud computing data centers. Nvidia wanted to acquire Arm for that very reason. Meanwhile, Amazon’s cloud business has started using the British group’s designs. Research firm IDC estimates that Arm could increase its data center market share to 10% in 2026, from 3% in 2021. Electric and autonomous vehicles will also drive Arm, according to Son.
But the Japanese billionaire has been wrong before. When he bought Arm in 2016, he touted the Internet of Things trend, which turned out to be wildly optimistic. A major investment program under the ownership of SoftBank has seen the adjusted EBITDA margin fall to 36%, from around 50% in 2016.
And Arm would have to grow at an astonishing rate to reach Son’s target rating. Its peers Nvidia, Advanced Micro Devices, Intel and Rambus are trading on average at 5.6 times 2024 sales including debt. To justify a value of 60 billion, using the same multiple, Arm has to be on track to achieve 11 billion sales in 2024, which is equivalent to a compound annual growth of 41%. That seems unlikely: chip giant ASML has warned of a two-year industry slowdown linked to supply chain problems. Bankers preparing to draft Arm’s IPO prospectus have their work cut out for them.
