Arm/SoftBank: chip sector multiple would mean $32bn IPO valuation

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Fortunes have turned for chip designer Arm. Last year, a glut of chips and falling demand for electronics presented a bleak outlook. Now, interest in the chip sector is at a record high thanks to the boom in artificial intelligence. The sooner the SoftBank-owned company lists, the better chance it has to hit a high valuation.

The need for more computing power, and more chips, is growing as companies bet on generative AI applications. This has pushed chipmaker Nvidia to an enterprise value above $1tn. For Arm, an enterprise value to sales multiple in line with Nvidia’s could mean a valuation of $67bn.

But Nvidia chips are crucial to power AI development and there are few alternatives to its high-end products. The same cannot be said for Arm. A broader, average industry earnings multiple would put Arm’s enterprise value closer to $32bn. However, Nvidia’s attempted acquisition and possible role as anchor investor in an initial public offering should lift this.

Arm’s main business model charges chipmakers small fees — reported to be about 2 per cent — for using its designs. Its dominance in premium smartphones means it is exposed to weakness in that sector. Last month, global smartphone sales fell for the eighth consecutive month.

Even when global chip sales hit a record $550bn in 2021, Arm revenues were just a small fraction of the total at $2.7bn.

Raising prices is difficult. China, one of Arm’s biggest markets, has long been developing RISC-V, an open-source chip design architecture that would serve as an alternative to Arm’s designs. Higher fees might encourage clients to invest more in developing substitutes.

Moreover, any hopes that Arm can develop its own chips are fraught. The move would put it in direct competition with its chip-making and chip-designing customers.

The AI-driven demand for chip stocks could be a once-in-a-decade moment for Arm’s IPO. But it does not warrant the same valuation as the leader in its sector.