Introduction

Arm, a British chip design company founded in 1990, is set to start trading in New York for the first time. In 2016, SoftBank took the company private. Arm licenses its chip designs to major semiconductor companies and device makers like Apple and Nvidia. Customers pay an upfront fee and a percentage of revenue per unit sold. The upcoming initial public offering is expected to value Arm at up to $54.5 billion.

Analysts’ Perspectives

Analysts have expressed both optimism and caution regarding Arm’s growth prospects and valuation. Many analysts believe that Arm will benefit from strong demand trends in artificial intelligence, data centers, automotive, and the Internet of Things markets. However, they also highlight risks such as competition from RISC-V, an open standard chip architecture, and customer concentration. The top five customers generate over 50% of the company’s revenue, and losing any of them could have a significant impact on Arm’s finances.

China Risks

Analysts have also noted Arm’s limited control over its China joint venture, Arm China, which contributes 24% of the company’s revenue. Arm’s relationship with Arm China raises execution risks, as Arm can only sell to China customers through this channel. Arm China could offer competing products, and Arm currently has little control over its means of selling in China. Arm has acknowledged the significant risks associated with its setup in China in its filings.

Valuation Concerns

Some analysts at New Constructs have challenged Arm’s valuation. They suggest that SoftBank, Arm’s owner, has inflated the company’s value through self-dealing private investments. SoftBank acquired 25% of Arm shares it did not directly own from the SoftBank Vision Fund. New Constructs analysts believe that the valuation is based more on SoftBank’s manipulation rather than the company’s fundamentals.

Growth Prospects

While expecting healthy top-line growth driven by cloud, automotive, and mobile royalties, analysts at Bernstein remain cautious. They have increased their overall revenue growth rate for Arm but still have reservations. They point to Arm’s drop in profitability in 2022 as a concern, suggesting that margins may take longer than expected to recover due to R&D costs primarily driven by employee expenses.

Cost Control Challenges

Analysts at Redburn Atlantic predict that Arm’s revenue projections will require rapid royalty rate increases and tight cost controls beyond historical precedents. They believe that Arm may struggle to reduce costs as it promotes a new design during a sector downturn. The company recently announced its ARMv9 Instruction Set Architecture, which will be used by semiconductor manufacturers to make chips for the data center. However, supporting customers to bring these products to market may make it harder for Arm to control operating expenses.