Arm Holdings may not be a household name, but the designer of central processing units (CPUs) made headlines in 2020 when Nvidia announced plans to buy the company for $40 billion. The deal ultimately fell through, with Nvidia citing "significant regulatory challenges preventing the consummation of the transaction."
Now, Arm is pursuing another venue, filing an F-1 with the Securities and Exchange Commission (SEC) in its first step toward an initial public offering (IPO).
Let's see what the regulatory filing tells us and why Arm thinks now is the right time to go public.
Image source: Getty Images.
A little background
In the F-1, required for foreign companies wishing to go public on U.S. markets, Arm said it "[provides] the most pervasive CPU architecture in the world." The filing notes that the company has shipped 250 billion processors since inception, with 30 billion shipped in fiscal 2023. Arm says, "We architect, develop, and license high-performance, low-cost, and energy-efficient CPU products."
Arm's CPUs are a staple in more than 99% of the world's smartphones and the "vast majority of the world’s software, including the operating systems and applications for smartphones, tablets and personal computers, data centers and networking equipment." Its technology also powers vehicles, smartwatches, thermostats, drones, and industrial robotics. As a result, the company estimates that "70% of the world's population uses Arm-based products." The proliferation of computing devices "has driven the dramatic growth of Arm-based chips over the past several years."
As this is the company's initial F-1 filing, it has yet to disclose when it plans to go public, how much it plans to raise from its offering, and what valuation it hopes to achieve. Numerous news reports suggest Arm is looking to be valued at between $60 billion and $70 billion -- significantly higher than Nvidia's $40 billion buyout offer of just three years ago.
By the numbers
As rosy as the narrative sounds, Arm's IPO comes on the heels of the worst downturn in more than a decade, which was evident in the company's recent financial performance.
For the fiscal year ended March 31, Arm generated revenue of $2.68 billion, down 1% year over year. This resulted in net income of $524 million, a decline of 5%. This was a far cry from its performance in the prior year, which yielded 33% revenue growth, resulting in net income that climbed 42%.
Based on its net income, a valuation of $65 billion would imply a price-to-earnings ratio of 122, which is wildly high for a company with flat growth over the past year.
Arm makes the bulk of its revenue from royalties for its chip designs, a process that can play out over decades. Nearly half the company's royalty revenue for the most recent fiscal year is the result of products designed and released between 1990 and 2012, according to a report by Bloomberg.
The company noted that even after the IPO, it would still be controlled by SoftBank Group, though the initial filing was mum on the exact ownership stake once it goes public. At one point in the filing, it notes that SoftBank will "have the right to nominate up to eight candidates for election to our Board of Directors for as long as it and its controlled affiliates hold more than 70% of our outstanding ordinary shares." This suggests that SoftBank's ownership stake will be north of 70%.
A watershed moment
The move comes at a watershed moment in the semiconductor industry. Over the past few months, Wall Street has been cultivating a love affair with artificial intelligence (AI). The latest developments in large language models gave birth to generative AI, which requires a massive amount of computational horsepower. Nvidia's graphics processing units (GPUs) have been at the forefront of this technology. It appears Arm is trying to capitalize on the moment.
Arm Holdings mentioned AI 44 times in its regulatory filing, trying to cast itself as the next Nvidia. One example: "The CPU is vital in all AI systems, whether it is handling the AI workload entirely or in combination with a co-processor, such as a GPU or ... [neural processing unit]." However, this ignores the fact that the GPU does much of the heavy lifting, and there are plenty of CPU peddlers out there.
While Arm has been gaining share in the data center CPU market, it's still a minor player by all accounts, competing with the likes of Intel and Advanced Micro Devices. Arm-based processors are expected to account for roughly 8% of the data center CPU market in 2023, while Intel and AMC will command 71% and 21%, respectively, according to industry publication DigiTimes.
Nvidia, for its part, has cornered the data center GPU market with an estimated 95% share, according to Angelo Zino, senior equity analyst at CFRA Research. It holds an equally commanding 95% share of the machine learning market, according to data compiled by New Street Research.
The takeaway
There's no denying Arm Holdings' pedigree in the semiconductor space. The company has a long, distinguished history of innovation -- or Nvidia wouldn't have offered to buy it. By invoking AI as its next big opportunity, Arm is hoping to capture an Nvidia-like valuation, but at this point, the numbers simply don't add up.
Investors should keep an eye out for Arm's next regulatory filing, which should help answer some of the lingering questions.
