Arm: IPO valuation climb down does not go far enough

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Lining up a bountiful selection of underwriters and cornerstone investors for an initial public offering is no guarantee of success. Just ask Arm. On Tuesday, the SoftBank-owned chip designer unveiled the target price range and valuation for its eagerly awaited IPO. Despite a consortium of 28 banks working as cheerleaders on the deal, the price will disappoint its owner.

Arm seeks to sell shares at between $47 and $51 a share. At the top of the range, it would raise $4.9bn, valuing the UK-based company at $52bn. Arm will be this year’s biggest IPO. But the bar is set low. The valuation is a steep reduction on the $64bn figure SoftBank applied in an internal transaction less than a month ago.

Dealmakers have been known to start roadshows with a conservative price range that can be driven up via effective marketing. Arm’s valuation could change between now and final pricing next Wednesday. SoftBank retains about 90 per cent of the shares, and can still benefit from any gain in the shares post listing.

But there is little reason to expect such a pop to be forthcoming. A valuation of $52bn — or 99 times trailing net income — still looks expensive. Nvidia can justify its multiple of 275 times trailing profit thanks to the central role its chips play in artificial intelligence development. It forecasts huge revenue and profits growth. The company’s $1.2tn market valuation translates into 30 times earnings based on 2025 consensus forecasts.

The same cannot be said for Arm, whose fortunes remain tied to smartphones — a market in decline. That is reflected in Arm’s flat revenue growth and meagre 6 per cent increase in net income last year.

Lex argues that a broader, average industry earnings multiple would put Arm’s enterprise value closer to $32bn. Arm’s pricing range should change between now and the company’s listing. But not in the upward direction that the company’s bankers are hoping.