Arm Considers Higher Valuation as IPO Demand Surges

In a highly anticipated move, SoftBank-owned chip designer Arm is reportedly on the brink of securing substantial investor support, which could potentially push its valuation beyond the $54.5 billion initially sought in its upcoming initial public offering (IPO). Citing sources familiar with the matter, this development comes on the back of remarkable demand from investors and the impressive response to its stock market debut in the United States, making it the largest IPO in the country in the past two years.

Arm, renowned for its semiconductor design prowess, is said to be in discussions regarding raising the IPO price range in response to the overwhelming demand. Alternatively, the company may choose to maintain the current price range but price the IPO above the upper limit, resulting in a valuation surpassing the originally targeted $54.5 billion. These considerations reflect Arm’s desire to capitalize on the strong market interest and achieve an optimal valuation.

Notably, Arm does not intend to offer additional shares, as SoftBank remains committed to maintaining a 90.6% stake in the company after the IPO, which is expected to raise approximately $5 billion. The decision on whether to revise the price range will be made in the coming days, following key investor orders expected on Monday.

Despite the positive momentum, sources caution that some investor commitments remain tentative, and the trajectory of orders could still evolve. Both SoftBank and Arm have yet to issue official statements regarding these developments.

This valuation represents a significant departure from the $64 billion valuation at which SoftBank acquired the remaining 25% stake in Arm last month. However, even with the lower valuation, SoftBank appears poised for a more favorable outcome compared to its previous attempt to sell Arm to Nvidia Corp for $40 billion, which was ultimately abandoned due to regulatory concerns.

Arm has already secured commitments from several major clients, who will serve as cornerstone investors in the IPO. Among these prominent backers are tech giants such as Apple, Nvidia, Alphabet, Advanced Micro Devices, Intel, and Samsung Electronics.

Arm’s decision to go public comes as the company seeks to diversify its portfolio and demonstrate growth potential beyond its dominant position in the mobile phone market, where it boasts an impressive 99% share. Weak mobile demand during recent global economic challenges has caused Arm’s revenue to plateau, with sales totaling $2.68 billion in the 12 months ending in March, compared to $2.7 billion in the preceding period.

To appeal to potential investors, Arm has highlighted its prospects in the cloud computing and automotive markets. With just a 10% share in cloud computing, Arm envisions significant room for expansion, as this sector is expected to grow at an annual rate of 17% through 2025, partly driven by advancements in artificial intelligence. Furthermore, Arm holds a commanding 41% share in the automotive market, which is forecasted to grow by 16%, in contrast to the modest 6% growth projected for the mobile market.

One critical aspect under scrutiny by investors is Arm’s exposure to the Chinese market, given ongoing geopolitical tensions with the United States and the race to secure chip supplies. In fiscal 2023, sales in China accounted for 24.5% of Arm’s $2.68 billion in revenue.

Arm has also noted the sustained growth of its royalty fees, which constitute a substantial portion of its revenue. Royalty revenue reached $1.68 billion in the latest fiscal year, up from $1.56 billion in the preceding year.

In conclusion, Arm’s upcoming IPO is generating significant excitement and investor interest, potentially leading to a valuation beyond the initially targeted $54.5 billion. The company’s strategy to diversify into burgeoning markets and capitalize on its strong client relationships positions it for future growth, making it a compelling investment opportunity in the semiconductor industry. However, as with all financial endeavors, it remains crucial to closely monitor the evolving landscape and investor sentiment.