The ARM Holdings IPO is poised to be one of the biggest tech IPOs of 2023. Its parent company SoftBank has been trying to push the ARM IPO into the dispiriting doldrums of the quiescent IPO market. As one of the much-hyped IPOs to go live this year, the ARM IPO’s valuation is a topic of scintillating interest for almost all analysts. But as the ARM IPO share price surrenders to list on NASDAQ, there are some risks and regrets that are lying in wait, to be picked on.
We’re delving right into the notions of why you may not wish to blend into the herd verdict on the biggest tech IPO of 2023 and might want to sit out on the ARM IPO. In this article, we articulate a picture of the risks that ARM Holdings Ltd faces and explore its potential for success in the IPO market. After all, none of the IPOs can be scrutinized judiciously by wearing rose-colored glasses.
The Risks Of Buying Into The ARM IPO
As the British chip designer prepares to go public, ARM Holdings faces a myriad of challenges and risks which are condescending into why you should think more than thrice, and analyze the entire scenario, before jumping on the wagon of “How to invest in the ARM IPO”.
Masayoshi Son is the Japanese billionaire who owns SoftBank Group, the chip designer behind ARM IPO. (Image Courtesy – Shutterstock)
ARM IPO’s Complex Relationship with ARM China
ARM Holdings heavily relies on China as a critical market, with approximately one-quarter of its revenue coming from the People’s Republic of China (PRC).
However, this concentration of business makes the ARM Holdings particularly susceptible to economic and political risks affecting the region. In its initial public offering filing prospectus, the ARM IPO has outlined various challenges it faces in China, including a potential complete loss of control over its pivotal Chinese subsidiary, ARM Technology (China) Co.
ARM China, ARM Holdings’ largest customer in China, is crucial for accessing the PRC market. However, neither ARM Holdings nor SoftBank Group Corp, have control over ARM China.
SoftBank owns only 48 percent of the subsidiary, with the majority being held by local investors, including entities affiliated with the former CEO, Allen Wu. The power struggle and allegations of conflicts of interest have created uncertainty and the potential for leadership changes, which could significantly impact ARM’s regional operations.
ARM IPO faces immediate challenges in the Chinese market, such as a slowdown in the world’s largest smartphone market and manufacturing hub. To add fuel to the fire, the US and its allies have strategically tried to limit China’s access to leading-edge technology, impacting ARM’s sales.
To adapt to its newfound wobble, ARM had to sell architecture for lower-performance chips in China, which affected its royalty revenue growth.
ARM IPO’s Share Price Dependence On Key Customers
ARM IPO heavily relies on a limited number of customers, exposing the company’s revenue to greater risks. In the fiscal year that ended on March 31, 2023, five entities, including ARM China, accounted for a combined 57 percent of ARM’s total revenue. This lack of customer diversification poses challenges for ARM’s long-term stability and growth.
Another intriguing aspect of the ARM IPO is the company’s position vis-à-vis its own clientele. ARM Holdings provides chip marvels and architectural licenses to major tech giants such as Apple, Amazon, Nvidia, Broadcom, Qualcomm, and others.
However, it is also competing with these very companies by entering the IPO market. This unique dynamic adds an interesting layer to the ARM IPO, as it navigates the delicate balance of maintaining strong relationships with its clients while seeking its own success in the public market. ARM will have to burn through wads of a fortune on its R&D to build a competitive product in the data center realm.
Biggest Tech IPO Of 2023: Hinging On Anchor Investors
ARM IPO’s valuation also depends on its anchor investors – the strategic force that buys a stake even before the IPO’s initiation. In this case, the amount bought by the anchor investors ranges between 10 percent to 50 percent of the issued shares. Among the speculated prolific anchor investors of ARM Holdings are TSMC, Microsoft, Alphabet, Samsung, Apple, Nvidia, and Intel.
However, don’t be swayed by these bankable stars as the deeply involved institutions in an IPO are quintessentially obligated to a lock-up period where they don’t trade the IPO shares until several months following the offering.
This implies that active market participants have enough capital and power to influence the factors of trading around ARM’s share price. Securing the return immediately after the ARM IPO launch will be the target of retail investors.
ARM IPO Valuation and Share Price
The valuation of the ARM IPO according to reports suggests that ARM Holdings aims between $60 billion – $70 billion. This ambitious ARM IPO valuation reflects that despite the risks, the company is confident about its market position, innovative technology, potential for growth, and ability to navigate the challenges.
The share price of the ARM IPO will ultimately be determined by market demand and investor sentiment. A successful IPO could pave the way for ARM Holdings to establish itself as a long-time dominant player in the semiconductor industry.
But it is disarming to know that ARM Holdings divulged $2.68 billion as its revenue for 2022 and is anyway trying to go public at a $64 billion market cap. The revenue has shrunk by 2.5 percent in last year with earnings dropping 53 percent in the previous quarter. It implies a 26x revenue jump if the ARM IPO succeeds. It would be harrowing to jump in to buy ARM IPO at that initial valuation, which seemingly tries to capitalize off on Nvidia’s momentum.
Some sources have hinted that SoftBank is galvanizing to sell 25 percent through the ARM IPO and pledge the remaining shares they own {$52.5 billion at a $70 billion valuation} for a $8.5 billion loan facility.
As the IPO date approaches, investors and industry observers eagerly await the company’s debut on the stock market, which has the potential to reshape the landscape of the tech industry. Just like a coin with two sides, while there are certain risks associated with the ARM IPO, there are also robust reasons why investing in the much-awaited ARM IPO could be a massive boon to your folio. So what are you going to do? Invest or let go?
Disclaimer: As with the golden rules of investment, for any security asset, analyze the market and do your due diligence before investing.
