The IPO market remains weak. In October, self-driving technology company and Intel (INTC) spinoff Mobileye (MBLY) slashed its initial offer to valued the company at about $16 billion, down from expectations as high as $50 billion in April, to address that weakness. Intel raised about $800 million with the spinoff.
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The outlook is not helping top chip design company ARM either.
Apple (AAPL) has a long-standing license agreement with ARM, which provides the design and instructions for the chips that power Apple’s iPhones, iPads, Apple Watch and Apple TV.
In 2020, Apple moved away from Intel and started making its own chips, using ARM’s processor cores, for its MacBook. Microsoft (MSFT) started using ARM’s design for the servers for its cloud in the same year. In 2010, Apple moved away from Samsung to its own chip for iPhone 4 using ARM’s design. Earlier, Nokia (NOK) was the first mobile device maker to adopt ARM’s design.
ARM’s open licensing agreement has allowed it to become a veritable monopoly in smartphones since. The benefit for device makers is also from ARM’s reduced instruction set in microprocessors, which is ideal for smaller devices.
Private Deal Fails
ARM is based in London. It had its IPO in 2008 and was publicly traded on the Nasdaq under the ticker ARMH and on the London stock exchange. In 2016, Korea’s Softbank purchased the company for $32 billion, giving it a valuation of 21 times sales.
Softbank has been trying to offload the thriving enterprise for some time, though.
In 2020, Nvidia‘s (NVDA) bid for $40 billion for ARM fell through due to regulatory issues. The Federal Trade Commission felt the deal would stifle “competing next-generation technologies.”
After the Nvidia deal fell through in March, plans for an IPO valued the cutting-edge chip designer at $60 billion. Goldman Sachs was to be the underwriter with the listing to take place on the Nasdaq in March 2023. Softbank hoped to offset some of its $23.5 billion loss through the planned listing.
However, with the tech sector crashing, that lofty valuation appears to be rapidly falling out of reach. Most chip stocks are trading at low multiples in this year’s stock market dive. Even top publicly traded chip companies like, Nvidia, AMD (AMD) and Intel are trading closer to their 2022 revenue, according to analysts’ estimates.
Strong Earnings, Outlook Continue In Bleak IPO Market
ARM had a blockbuster quarter recently. Revenue grew 6% to $719 million. Revenue from royalties grew to $435 million, rising 22% year over year. ARM-based chip shipments by various chipmakers grew 7% to a record 7.4 billion chips thanks to its diversification beyond mobile to self-driving cars and data centers.
Its 2021 revenue was $2.7 billion. Even with this performance, and not counting the 2022 bleaker outlook for most chip companies, a comparable valuation with other chip stocks would price it at around $20 billion going by revenue multiples — a far cry from Softbank’s plans.
ARM will likely not fetch a premium to Softbank’s numbers in the event it does have an IPO in March. In one of the quirks in private equity deals, had Nvidia’s stock and cash acquisition gone through, ARM would have been valued at $80 billion when Nvidia shares hit a high in April.
Intel’s Mobileye spinoff might be a rare case of a successful IPO, although shares listed at the sharply lowered valuation of the company at $16 billion.
A Bloomberg report in September said Softbank made yet another attempt to enter an ARM partnership with Samsung, though the details are not known.
Meanwhile, ARM disclosed a new design for 5G communications devices and data centers. Data center behemoths like Amazon.com (AMZN) and Alibaba (BABA) already use ARM designs.
Softbank’s IPO plans for the company are in a limbo, but growth prospects remain solid despite the slowdown in smartphone demand. The advanced chip designer’s server markets alone are expected to grow to $16.7 billion by 2032.
Be sure to follow VRamakrishnan @IBD_VRamakrishnan on Twitter for more news on IPOs and private equity deals
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