By Mathis Grandchamp, Loïc Meunier, Alexandre Megrelis, Jules Donzelot, Giuliana Vadacchino and Blake Dal Santo (McGill University).
Photo credit: umberto (unsplash)
Summary of IPO
ARM Holdings (ticker: ARM) architects, develops, and licenses IP solutions for CPUs, GPUs, NPUs, and interconnect technologies, relied on by many of the world's leading semiconductor companies and original equipment manufacturers (OEMs) to develop their products. The company was valued near $60 billion at its initial public offering, representing a per-share selling price of $51. At its $60 billion valuation, ARM trades at a P/E multiple of 110x, a hefty premium which may re-open the market for technology IPOs which have remained quiet for over a year. The British company is the largest to have braved the public markets in 2023 and raised $4.87 billion.
Company and IPO Profile
Sector: TMT/Semiconductor and Processor Manufacturer
Ticker: ARM
Exchange floated: NasdaqGS
Amount raised: $4.87 Billion
Offered price and number of shares: $51/share with 95.5mn shares
Over-allotment option: 7 million ADS
Equity offered: 9.4%
Valuation and relevant multiples at IPO:
- Market Capitalization: $52.65Bn
- EV: $50.42Bn
- LTM EV/Revenue: 18.0x
- LTM EV/EBITDA: 126.6x
Lead Underwriters: Barclays, Goldman Sachs, J.P. Morgan, and Mizuho USA
Joint Global Coordinators: Barclays, Goldman Sachs, J.P. Morgan, and Mizuho USA; Bank of America, Citigroup, BNP Paribas, Credit Agricole CIB, MUFG, Deutsche Bank, Natixis, Santander, Jefferies, SMBC Nikko, BMO, KeyBanc, Daiwa, Loop, Guggenheim, Ramirez & Co., Rosenblatt, HSBC, Société Generale, TD Cowen, IMI-Intesa Sanpaolo, Independence Point Securities, Wolf|Namura Alliance.
Founded in 1990, ARM Holdings. PLC is headquartered in Cambridge, the United Kingdom, and operates as a subsidiary of Kronos II LLC. The company designs, develops, and licenses central processing unit (CPU) products and related technologies for semiconductor companies and original equipment manufacturers rely on to develop products. It offers microprocessors, systems intellectual property (IPs), graphics processing units (GPUs), physical IP and, associated systems IPs, software, tools, and other related services. Its products are used in various industries including but not limited to the automobile, consumer technology, computing infrastructure, and Internet of things. The company operates internationally with a focus on Asia and North America.
Founded in 1990, headquartered in Cambridge, United Kingdom
CEO: Rene Haas
Number of employees: 5,963
Deal Implied Market Capitalization: $54.5bn
Market Capitalization as of 11th Nov.: $53.59bn
Deal Size / EBITDA: 15.36x
Deal Size / Revenue: 1.72x
Deal Size / Cash Flow:
Deal Size / Net Income: 27.05x
Strategic Rationale
ARM's decision to initiate an IPO marks a significant transformation in its corporate strategy and market positioning. With a valuation of $54.5 billion, the IPO underscores ARM's immense value within the global technology ecosystem. Having operated privately since 2016, ARM's move to re-enter the public markets proves timely in the context of a thriving semiconductor industry. In 2023, the rise of Large Language Model technologies has strongly stimulated semiconductor companies, illustrated by players such as NVIDIA beating earnings expectations by over 30% after benefitting from an unprecedented surge in orders. Equally so, ARM stands excellently positioned to benefit from the disruption, supported by positive market sentiment amid a robust demand environment.
Another of the immediate advantages of the IPO is the enhanced visibility of ARM's brand. The extensive media coverage elevates the company's profile in the global market and is expected to attract further investment and partnership opportunities. These are crucial for ARM's growth and expansion, particularly with potential involvement from major tech players such as Apple, Amazon, and Nvidia.
Additionally, the IPO enables ARM to adopt a more dynamic business model. This includes directly licensing its technology to original equipment manufacturers and cloud companies, potentially increasing ARM's royalty revenues, and solidifying its AI and semiconductor industry position.
Market Reaction
Build Up
Following a quiet IPO period, investors, bankers, and tech executives anxiously looked out for how ARM shares would perform in the biggest IPO of the year. Its performance is telling and indicative of the IPO market, which has shown a cold streak after the worst IPO market in decades, seen in 2022.
Shares falling upon beginning to trade would signal the expectation for the IPO market to remain frozen for longer, whereas, should investors be receptive, this would signal a potential defrost, where an increasing number of companies would be more inclined to go public in the next few months. ARM offered 95.5mn shares under the ARM ticker, with a target range of $47 to $51, with the IPO price on the upper end of the range.
Launch
The stock launched at $51, raising $4.87mn, and began trading at $56.10, up 10% from the IPO price. At the end of ARM's first trading day, shares closed up 25% at $63.59, setting ARM's fully diluted valuation at $67.9bn. ARM's IPO performance reassured Wall Street and Silicon Valley, both of which have been closely watching the market for roughly two years, waiting for recovery and gauging investor appetite for tech offerings in particular. The brave offering signaled a recovering sentiment in the market, which can, hopefully, encourage other companies to go public.
Since its September IPO, ARM shares fell 6.8%, following an underwhelming first earnings report on November 8th, which forecasted a drop in revenue and reported a significant loss – the nearly 7% decline brought shares below the $51 IPO price. Revenue fell short of analysts' expectations, forecasting Q3 revenue between $720mn and $800mn, with a midpoint of $760mn, below estimates of $767.84mn. ARM, however, reported a higher full-year revenue forecast with a midpoint of $3.02bn, $70mn above analyst expectations – this was offset by a significant loss, which was also reported, following a more considerable than expected one-time expense of $509mn, driven by employee stock compensation costs, estimated between $150mn and $200mn for future quarters. ARM's halo effect was short-lived as it offered a rather weak outlook. As of November 17th, shares are trading ~8% above the IPO price.
Potential Risks and Downsides
Market conditions have improved over the last 2 years, and ARM shares were trading 10% above their initial ask for the IPO. This was a beacon to discover the sentiment of the marketplace. However, it could also signal investor engagement with the company in search of prospective growth in the initial stages of the public market. The intense media focus on the ARM's initial public offering could likely have created a sense of urgency among investors that drove the price beyond a reasonable level. This focus created around the IPO has also developed high expectations and share prices, which need to be justified, and any management errors could cause the stock price to be volatile. In essence, it is essential that they maintain the lofty growth expectations placed on them by investors in the IPO.
Initial public offerings are also geared to sell the company to you at the highest possible price, and share prices can be artificially inflated due to supply and demand differences as shares are initially sold. In fact, SoftBank Group and ARM have only set aside 10% of their shares to be sold in the initial IPO allocation, which could push prices higher. This could be reflected in their high valuation at the opening, trading well above their competitors in chip manufacturing. Similar to UBER's share price decline following their IPO due to competition with Lyft, ARM also faces intense competition from Intel and AMD, putting additional pressure on their performance.
Sources:
https://www.nytimes.com/2023/09/13/business/ARM-ipo-pricing.html#:~:text=ARM%2C%20the%20British%20chip%20design,the%20company%20at%20%2454.5%20billion. https://www.nytimes.com/2023/09/14/technology/ARM-ipo-stock-market.html
https://www.cnbc.com/2023/09/13/ARM-prices-ipo-at-51-per-share.html https://www.nytimes.com/2023/09/13/business/ARM-ipo-pricing.html https://www.reuters.com/technology/ARM-sees-full-year-sales-ahead-wall-street-weaker-q3-deal-delay-2023-11-08/#:~:text=ARM%20said%20it%20forecast%20a,according%20to%20data%20from%20LSEG. https://www.reuters.com/technology/ARM-shares-sink-some-analysts-question-valuation-after-weak-forecast-2023-11-09/