Arm’s Nasdaq Debut: Good for SoftBank, But a Head-Scratcher for Wall Street
The recent Nasdaq debut of Arm, a UK-based chip design company, has been positive for SoftBank, which recently spun off the company after acquiring it in 2016. However, it has left Wall Street puzzled.
Impressive Stock Jump
Arm’s stock soared by 25% to $63.59 after its initial public offering (IPO), pushing its fully diluted market cap to nearly $68 billion. This valuation is exceptionally high for a semiconductor company that generated $400 million in profit over the past four quarters. In fact, it results in a price-to-earnings (P/E) ratio of close to 170, far surpassing Nvidia’s P/E ratio.
Comparing with Nvidia
Nvidia, known for developing graphics processing units (GPUs) used in artificial intelligence workloads, trades at a P/E ratio of 109 times trailing earnings. This is after its stock price more than tripled this year, making it the top performer in the S&P 500. In comparison, the P/E ratio of the Invesco PHLX Semiconductor ETF, which measures the performance of the largest US chip companies, stands at around 21.
Growth Rate Matters
The significant difference between Nvidia and Arm lies in their growth rates. Nvidia recently reported a doubling of revenue in the latest quarter and projected a 170% expansion in the current period due to increased spending on AI chips by major cloud companies. In contrast, Arm’s revenue slightly declined in the last quarter. Experts argue that justifying a P/E ratio of over 100 for a company with no growth is highly challenging, emphasizing the need for Arm to develop new designs to restart growth and generate profits.
Limited Open Market for Arm’s Stock
Currently, there is not a substantial open market for Arm’s stock. SoftBank owns 90% of the approximately 1.03 billion outstanding shares following the IPO. The Japanese tech conglomerate took Arm private in 2016 for $32 billion and now seeks to gain liquidity after a challenging period of investments. Strategic investors like Apple, Google, Nvidia, Samsung, and Intel purchased $735 million worth of shares, leaving only a small portion available to institutional and retail investors. Nevertheless, the trading volume was high enough on the Nasdaq for Arm to be the fifth most actively traded stock, with 126.58 million shares changing hands.
Investing in Arm: Betting on Growth
Investors considering long-term investments in Arm must believe in its growth potential. The company’s prospectus highlights its crucial role in the transition to AI-based computing, with its designs already present in smartphones, electric cars, and data centers. Arm expects the addressable market for its design products to reach $246.6 billion by 2025. Although this represents only 6.8% annual growth, Arm aims to enhance its prosperity through market share gains and improved economics.
Strong Profit Margins and Unique Position
Arm’s ability to maintain strong profit margins, even with a slight decline in revenue, is viewed as a bullish case. Unlike companies delivering hardware, Arm generates much of its revenue from royalties, resulting in a gross margin of 96% for fiscal 2023. In comparison, Nvidia’s gross margin for the latest quarter was 70%. Arm’s operating margin was 25% in the same period, demonstrating its profitability even during a challenging time for the chip industry.
According to Matt Oguz, a founding partner of Venture Science, Arm is not a commodity company due to its unique position and widespread technology integration across multiple key products. Calculating a multiple on future earnings for Arm is challenging given these factors.
Correction: Arm’s revenue shrank in the latest quarter. An earlier version misstated the company name.
WATCH: ‘s full interview with SoftBank’s Masayoshi Son and Arm’s Rene Haas