ARM IPO: What you need to knowSep 14, 2023
Meanwhile, it could be the IPO of the year as chipmaking arm Holdings prepares to price the shares after today's close and a big time for the semi-finals and IPO. Market in general ARCA Leslie picker and Christina parts nevolos are going to break the action here Leslie, first tell us a little about
whatyou're hearing tonight, hey Carl, yeah, it should be the biggest IPO of the year, in fact, it should being the largest initial public offering in several years, it is a reduced marketing process than it initially was. What I was hoping I heard is that the book currently has over 10 subscriptions which bodes well for the price and that they should set the price at the high end of the range or higher given that demand, indicating a valuation at a fully diluted level. a base of around $54.5 billion or more, that's great news for the psychology of this deal and for the obvious strategy surrounding this deal, but initially there were reports that this company could be valued at $70 billion dollars, so it's definitely a discount to
whatwas previously reported in terms of the targets they were looking for, but it's still not a bad strategy to go in at a more moderate or modest valuation and be more conservative on that front with the hope to obtain that demand.
Hopefully the book fills up a few times and then you can guarantee or at least hope to have a pretty decent debut when this starts trading tomorrow. Honestly, stick around, we want to bring Christina on to talk about not only the capital markets element, Christine, but also. the business model itself, which is important because this is a company that provides the architect for many things, but you have the valuation of 54, the valuation of 54 billion. Leslie talked about the words chips and artificial intelligence that are really setting this IPO up for maybe success, but the AI hype may not be justified, so like I said, I was just talking about thinking in arm. as a coding model for companies like Nvidia or Apple to use to design their own chips.
Arm's architecture is so popular that it powers 99 of the global smartphones that were in the Perspectives in many media are using that line, but in reality what they do is charge a licensing fee and a royalty for each chip that contains their technology, which is a great achievement, but leaves concern about future growth when penetration levels are like 99 on all smartphones. is very high in a mobile phone market that is cyclical and exposed to long replacement cycles. Additionally, the arm specializes in coding for central processing units (CPUs) and not necessarily those more sought-after AI graphical processing units.
The GPU arm even calls GPUs its complementary business in its outlook. making it more difficult to capitalize on the current hype over AI, other risks include that around a quarter of its total revenue comes from armed China, which really operates in a black box as an independent entity, it also has high levels of spend on R&D and also gets around 50 percent of total revenue from just five clients and that means concentration risk. Of course, there are some big anchor investors like Nvidia tsmc that are on the arm and the balance sheet is very strong. There's no great debt coverage ratio, but there are risks to its growth trajectory ahead. its IPO and it's important to
know, Leslie, what are you hearing about risk factors?
The ones that Christina mentioned, the China risk that we've been talking about the last few days, are our investors who ignore it. Yeah, it's been a big concern and I think. That is one of the reasons why the valuation had to be discounted: there is this risk of customer concentration, there is a huge exposure to China in particular and there is some uncertainty about the growth prospects of that market and, of course, this It's a company. It is not a large producer at this time, it will be a controlled company. SoftBank will still own about 90 percent of this company after it goes public.
All of those risks, especially in light of what we're seeing, where we are in the smartphone market. Is this a depression or does it stabilize at these lower levels? Those are all concerns that investors are dealing with, but again, if you can get a deal and if you can feel like you're getting a deal, you're going to get a discount in terms of purchasing. shares, then maybe there is some upside. There was an analyst note this morning that basically showed a price target of, I think, 59 per share, which is about a 15 upside, so you
know, that's decent in a year, it's nothing for you, really. . deliver Alpha into one's portfolio if it's down, but you know it's definitely nothing to shy away from, yes, although the multiple we're talking about there, even with the significant increase in its growth rate, is not insignificant , yes, no, sorry. go ahead, yeah, I mean, actually, Christina, go ahead, no, after you, no, the valuation is not insignificant, it's uh, or you just talked about the ratio, but Leslie used the word conservative and we have to go back even to 2020, when Nvidia tried to buy this company for 40 billion dollars the FTC blocked it 40 billion we are talking about a valuation that is at least 54.5 possibly even more it is crazy to hear the word conservative with so much growth alone in the last three years, especially when SoftBank bought the company for 32 billion in 2016.
In terms of you were just talking about price targets, everyone is excited, but only 10 of the float will be available to retail investors, which it means there will be a lot of clamor for a small slice of the stock when the institutional anchor guys are already in, uh yeah well retail will be even smaller than that because there will be a lot of hedge funds in other institutions that actually hold stocks exact, but Leslie gets to the point. you did it, it's a small float, obviously, SoftBank will control 90 um. It's unclear if they have any intention of selling beyond that, although Masa, who runs SoftBank, will certainly take it as a big win, Leslie, while we'll catch you quickly.
You know, we shared this news in City, it's another topic that you cover closely, in terms of at least simplifying the reporting structure, what do we do with these moves? by Jane Frazier. Yeah, I think this was telegraphed pretty decently. There will be some structural changes here. A source told me that we could expect to see how we would handle any organizational change of this magnitude. We could expect to see some job cuts as a result of this. We don't know the size of these jobs. Cuts, but that's something to keep in mind, as well as the financial implications of layoffs and other restructurings.
I know Jane Frazier is currently speaking in a surprise appearance at the Barclays Financial Services conference. She initially wasn't on the show, it was supposed to be solo. their CFO, Mark Mason, but she said that's how she characterized it, that these changes are the most important and how the city will be organized and managed, something they've done in 20 years, so basically what they're doing is create uh. These five businesses, her division heads, will report directly to her, helping her get a clearer view of exactly what those businesses are doing. Her goal is to really simplify and make sure everything is transparent and works efficiently, so we.
We'll see if they're able to execute on that front Leslie Christina, thanks to both of you of course, we're hoping it's less than 24 hours away from trading.
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