- Investors excited by return to equity markets for UK tech champion
- Chip design giant aiming for $60 billion to $70 billion valuation
- IPOs this year suggest a much lower price tag
Giant UK microchips designer ARM has filed its highly anticipated Wall Street IPO (initial public offering), marking a return to equity markets for the Cambridge-based company having been owned by Japan’s Softbank (9984:TYO) since 2016.
Estimating pre-flotation valuations for any company ahead of an IPO is difficult, but ARM is a unique business and the frenzy for everything AI (artificial intelligence) this year makes Arm more complicated.
WHAT MAKES ARM DIFFERENT
ARM does not make microchips but instead designs the architecture on which chipmakers build their semiconductor designs. Customers include the world’s largest chip manufacturers, such as TSMC (2330:TPE), Samsung (005930:KRX) and Intel (INTC:NASDAQ), and fabless chip design companies like Nvidia (NVDA:NASDAQ), Advanced Micro Devices (AMD:NASDAQ), Qualcomm (QCOM:NASDAQ).
Building a new house is a decent example. While Nvidia and its ilk might decide where to put interior partition walls, doors and furniture, ARM designs where load-baring walls, windows, plumbing and gas/electricity supply go.
VALUATION QUESTION
ARM’s unique capability should see it earn a premium rating, while the frenzy for advanced AI technology will also likely draw investors to back the IPO. Bloomberg has previously reported that the company was aiming for a valuation between $60 billion and $70 billion.
AI has seen some chip design firms attract some of the highest valuations among the Nasdaq 100. Nvidia – seen as the AI chip technology leader – trades on 44.9-times price to sales based on the past 12 months. However, Qualcomm’s and Advanced Micro Devices’ equivalent is 3.1 and eight, creating a minefield for analyst hoping to estimate ARM’s valuation with any accuracy.
ARM reported $2.68 billion in revenue for the year to 31 Match 2023.
Chip technology IPOs this year, like Synopsys (SNPS:NASDAQ) and Cadence Design Systems (CDNS:NASDAQ) trade on price to sales multiples of 12 and 16 respectively, which would imply an ARM value of between about $32 billion and $43 billion for the chip designer.
| POSSIBLE ARM VALUATIONS - PRICE TO SALES MULTIPLES |
| Nvidia | 44.9 |
| Advanced Micro Devices | 8 |
| Qualcomm | 3.1 |
| Synopsys | 12 |
| Cadence Design Systems | 16.1 |
| Source: Koyfin |
