In late 2020, Nvidia (NVDA +0.77%) stunned the tech world by launching a $40 billion bid to buy CPU specialist Arm Holdings from Softbank Group. The acquisition would have created the "world's premier computing company for the age of artificial intelligence," according to Nvidia. Regulators ultimately quashed the deal, and the companies terminated their efforts in early 2022.
That wasn't to be the end of the story, however, and the next chapter in this tale is about to commence. Arm Holdings recently filed an F-1 with the Securities and Exchange Commission (SEC), the first step in its bid for an initial public offering (IPO).
In an amended F-1 filing, which dropped on Sept. 5, Arm Holdings provided additional details to investors that suggest its public debut could be the biggest IPO of 2023.
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The numbers tell a tale
Like many companies in the technology sector, Arm has suffered from the macroeconomic headwinds that prevailed over the past year. For the fiscal year ended March 31, Arm generated revenue of $2.7 billion, which declined 1% year over year, resulting in net income of $524 million, down 5%.
While that was a respectable performance given the difficult environment, it pales in comparison to its prior-year performance, when revenue grew 33% and net income jumped 42%.
Arm's struggle to return to growth continues. For the quarter ended June 30, the company reported revenue of $675 million, down 2% year over year. Profits took an even bigger hit, as net income of $105 million slumped 53%. This illustrates that Arm has yet to overcome the broader economic headwinds that have buffeted many in the technology industry. Perhaps more importantly, the company has yet to fully tap into the increasing demand for AI processors.
Can Arm be the next Nvidia?
There was no doubt that Arm's return to the public markets would be a grand affair. Softbank took the chipmaker private in late 2016 for $32 billion. Now, the company is looking to cash in on its investment.
Arm revealed it's looking to issue 95.5 million American depositary shares, priced in a range of $47 to $51, though that could change based on investor demand. With just over 1 billion shares outstanding, this would value Arm Holdings between $48 billion and $52 billion, depending on the final issue price. In light of its most recent results, these are lofty ambitions, indeed.
If it achieves the valuation it's seeking, Arm won't be valued as richly as Nvidia, but it could still fetch a hefty premium. The company hopes to be valued at between 92 and 99 times its trailing-12-month earnings. For context, Nvidia stock is currently selling for 114 times earnings, though this is an apples-to-oranges comparison.
For its fiscal 2024 second quarter (ended July 30), Nvidia delivered revenue of $13.5 billion, up 101% year over year (and 88% sequentially), resulting in net income of $6.2 billion, up 843%.
So, while Nvidia's results suggest it deserves a lofty premium, Arm's recent performance doesn't show nearly as much promise.
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Key Data Points
Riding the AI train?
It's clear that Arm hopes to ride the wave of excitement surrounding artificial intelligence (AI), as the company mentioned AI 44 times in its regulatory filing. "Arm CPUs already run AI and [machine learning] workloads in billions of devices, including smartphones, cameras, digital TVs, cars and cloud data centers," it said.
However, for all the references, its financial results suggest that its CPUs aren't as central to the processing of AI as Nvidia's graphics processing units (GPUs) and, therefore, may not have as much to gain. It's important to note that Nvidia and others integrate Arm's components and blueprints into their processors, which could generate additional growth -- though it hasn't happened yet.
To be clear, Arm's processors are pervasive, found in 99% of the world's smartphones and a host of other devices, but that doesn't necessarily translate into a clear benefit for the company from AI. Arm's chips are extremely power efficient, so the company's angle is to convince other chipmakers to integrate its technology into their own rather than reinventing the wheel.
As a result, some of the world's most notable tech companies -- and Arm customers -- are expressing interest in the company's public debut. The filing noted that Advanced Micro Devices, Apple, Alphabet's Google, Intel, and Nvidia -- among others -- plan to purchase as much as $735 million in Arm shares, though they're not committed to following through on that interest.
While Arm stock may be in high demand when it goes public, individual investors should exercise caution. Its IPO could well end up being the biggest IPO of the year, but the price seems a bit steep for a company with tepid results.
