Those still mourning the decision by Arm, the Cambridge-based chip designer, to shun London’s sleepy stock market in favour of a listing on Nasdaq can take solace. It turns out that US investors, contrary to caricature, aren’t so tech-obsessed that they’ll pay top dollar unthinkingly. They also fret about fuddy-duddy fundamentals such as growth rates, price-to-earnings ratios and the political risks that come with not controlling your important Chinese operation.
Thus expectations for Arm’s flotation in New York have come rattling back. Once upon a time – actually only about a month ago – outsiders’ rough guesses for Arm’s price tag was $70bn on the grounds that the company is a proven pioneer and the artificial intelligence revolution lies ahead. Last month, $64bn was the implied valuation in a transaction whereby owner Softbank bought in the 25% stake it did not already own. Now $50bn-$55bn is the range being reported in the US.
None of this alters Arm’s status as a giant in its field; its chip designs are in most of the world’s smartphones. The British government and the London Stock Exchange were right to fight for a UK relisting, even if the odds were always against success. But a cold read of the US prospectus also suggests that the emerging air of scepticism on valuation, wherever the IPO venue, is justified.
First, the revenue line isn’t moving like that of some other go-go growth tech companies – the figure was actually down slightly at $2.7bn last year. Second, profit margins, at 20%, are nice but not wildly so for tech-land. Thus, at a $50bn valuation Arm would be valued at 75 times last year’s operating profit, which would be going some.
Then there is the Chinese angle: the fact that Arm has only a minority stake (via a complicated structure) in Arm China, which accounted for 24% of group revenue last year. That is a legacy of putting the operation into a joint venture in 2018 to maximise opportunities to sell into the local market. But it also means that the “risk factors” section of the prospectus contains some striking lines.
For example: “Our concentration of revenue from the PRC [People’s Republic of China] market makes us particularly susceptible to economic and political risks affecting the PRC, which could be exacerbated by tensions between (on the one hand) the US or the UK and (on the other hand) the PRC with respect to trade and national security.” That one may be important one day.
On the plus side, Arm customers – including Apple, Alphabet and Nvidia, the hottest company in the AI market – are reported to be keen to take a few shares in the IPO, which should help sentiment. And, given that 28 investment banks are listed as underwriters, Arm has a battalion of helpers to assist Softbank’s Masayoshi Son in shifting only a 10% stake.
Son, having plucked Arm from the UK stock market in 2016 for £24bn ($30bn) while the government was too distracted by the Brexit vote to make a fuss, will show a profit whatever happens. But if the market is doing its job, it will be a smaller one than he expected. Arm is a great British company, but $50bn still looks a helluva price.