SoftBank Group is planning to list its ARM Ltd segment via an IPO sometime in 2023, subject to market conditions. The IPO will be led by four investment banks, namely Goldman Sachs, JPMorgan Chase, Barclays, and Mizuho Financial Group, and it is expected to take place in the US. While UK ministers had been lobbying for the company to list on the London Stock Exchange to boost high-value IPOs in London, ARM will list in the US instead, as the company had previously been delisted after being bought by SoftBank in 2016. In 2020, SoftBank had planned to sell ARM to US chipmaker NVIDIA for $80 billion, but the sale fell through due to competition issues. The IPO will provide an opportunity for private investors in the SoftBank-led Vision Fund, who own 25% of ARM, to cash in, and it will also enable ARM to offer stock options as employee incentives. Despite the turbulent times for tech stocks in public markets, the ARM IPO is expected to be a high-profile float and could boost the IPO market.
What does ARM do?
ARM is a British company that specializes in the design of semiconductor chips, processors, systems, and platforms. Although ARM does not manufacture computer processors, it licenses its designs to other production firms. The company is known as the R&D department for the entire semiconductor industry.
ARM was originally formed as a joint venture with Apple in 1990, but the venture failed, leading Apple to sell its 43% stake in ARM to acquire NeXT. Soon after, Nokia began using ARM-based solutions, which led to other mobile phone manufacturers, including Apple, adopting ARM-based chips by the end of the 90s. ARM's chip designs were used as the basis for the first iPod, iPhone, and iPad upon Steve Jobs' return to Apple.
In 2016, SoftBank acquired ARM for $24 billion, a 43% premium over ARM's share price at the time. Despite concerns about the deal's financing, ARM's chips gained widespread popularity, and its designs are now used in a wide range of devices, such as tablets, computers, smart TVs, smart homes, electric vehicles, drones, electronic passports, and even automatic streetlights. ARM's technology can be found in around 95% of the world's smartphones, including Apple, Android, and Samsung, as well as 95% of chips designed in China.
What is the value of ARM?
ARM is expected to be valued at $40 billion, or £34 million, with a minimum target of $50 billion during its upcoming IPO. This is significantly lower than its previous valuation in 2021, when the company was valued at $80 billion due to the deal with NVIDIA. The value of the sale was directly linked to NVIDIA's stock price, which increased during the global chip shortage, resulting in ARM's increased valuation.
How does ARM generate revenue?
ARM's primary source of revenue comes from the royalties it earns every time a company manufactures a chip using its design. Due to ARM's market dominance, over 160 billion chips have been created based on its designs. The company's technology royalties grew 16.7% YoY, according to SoftBank's 2021 Annual Report. Additionally, ARM earns non-royalty revenue through licenses for processor designs to other semiconductor firms. These companies pay an up-front fee for access to the technology, as well as a royalty on each chip that employs one of the designs.
Is ARM a profitable company?
According to ARM's financial reports, its total revenue for 2021 increased by 35% to $2.7 billion, owing to significant growth in both royalty and non-royalty revenue. Until the company goes public, it is not obligated to make any other financial disclosures.
What is ARM's business model
To put it differently, ARM's business strategy revolves around staying ahead of the technological curve by investing heavily in research and development (R&D) to predict and develop technology for future markets. The company focuses on maintaining its current strong position in existing areas such as smartphones, consumer electronics, and embedded computing, while increasing its royalty revenue per chip by providing more advanced and valuable technology. ARM aims to establish market leadership in emerging areas like autonomous vehicles, IoT, and augmented reality headsets. In addition, the company aims to change the competitive landscape by introducing new business models, like directly licensing its technology to original equipment manufacturers (OEMs) and cloud companies. ARM's primary competitors include IBM, Intel, and AMD, who also manufacture semiconductor chips. However, ARM no longer faces significant competition in the smartphone chip space. When it comes to graphic processing units (GPUs), ARM competes with other major players like NVIDIA, Qualcomm, and Intel, but often combines their proprietary GPUs with ARM-licensed designs.
In conclusion, ARM's upcoming IPO has generated a lot of attention in the tech industry, as the company is expected to go public with a valuation of around $40 billion or higher. With its strong business model based on staying ahead of technological advancements and its market dominance in the semiconductor industry, ARM is well-positioned for continued success. The IPO will provide an opportunity for investors to own a piece of the company and participate in its future growth, particularly as it expands into emerging technology areas such as autonomous vehicles, IoT, and augmented reality headsets. It remains to be seen how the IPO will play out and what the future holds for ARM, but one thing is clear - the company's impact on the tech industry is undeniable, and its IPO is set to be a major event.
