ARM Holdings IPO – And the Inevitable Headlines

This week, ARM Holdings is poised to launch what will surely be the largest IPO of the year.  It’s an exciting event for the tech nerds among us, because this company has been either preparing its IPO, or preparing for sale for years.  For those of you that may not know ARM, the company has been around in some form or another since the mid-1980s and, in one way or another, has been tightly tied with Apple for most of that time.  This will be the second time the company has been public, as their original IPO took place in 1998, and in 2016, it was taken private by SoftBank for a paltry $32B.  And as recently as 2020, Nvidia offered to purchase the company for $40B before ultimately terminating the deal in early 2022 over regulatory concerns. That’s the 100,000-foot history lesson.  

Now, why is ARM important, and why on earth would the public be willing to pay $52 BILLION for a company that only produced $2.7B in revenue last year?  Like anything else, valuation is usually determined by understanding revenue, revenue growth, gross margins, and profitability.   Most often, the market looks far into the future to imbue some ultimate intrinsic value.  In this particular case, it’s that last part that means the most. 

The world of computing has relied heavily on an Intel design called the x86 as a framework for decades.  This framework can be found in everything from personal devices like phones, to supercomputers, and data centers.  But as time passes, and computing needs increase, things like flexibility and energy efficiency gain in importance.  And while the ubiquity of the x86 has its own momentum, so too does the need to add power-friendly processing units in all devices.  The interest in this company ultimately stems from the hope that ARM processors will have what Intel has for years… ubiquity.  

Now, as we look at the current deal, nearly all the biggest and most influential technology companies are planning on participating.  Apple, Google, Nvidia, Samsung, AMD, Intel, Cadence, Synopsis, and TSMC are all said to be participating, and Apple went as far as to sign a supply agreement through 2040.  All these companies are both excited and fearful of the disruption that could be on the way, and this is unquestionably why they are all participating. 

But the size of this deal transcends tech.  It’s been a very slow year for deals in private and public markets.  And much like we saw after a successful IPO for CAVA earlier this year, we expect the inevitable headlines that will read something like, “THE IPO MARKET IS BACK!”.  Make no mistake, this deal is big enough that it will fill a lot of Wall Street bankers’ wallets, but one deal, or even two, does not mean that the deal market is back in full swing.  But what it does suggest is that a good deal gets done in any market. 

The validation offered by Apple, Nvidia, Samsung, and others suggests that this technology is widely believed to be the next big disruptive force in compute.  Investors will always reach into their wallet for something truly unique.  While this is that, it is also not the only investable asset out there.  The truth is, the deal market never really went away, but quality took a dip.  Game-changing asset like these seem even more exciting at a time like this. 

Sources: The Wall Street Journal, CNBC