Arm is gearing up for what could be the largest initial public offering (IPO) of the year. While there may be skepticism surrounding its estimated valuation, analysts at Susquehanna Financial Group believe that this chip-design company deserves a premium valuation similar to that of stock market favorite Nvidia.
Favored Valuation Range
According to filings, Arm has been aiming for a valuation of up to $52 billion. The company plans to offer American depositary shares priced between $47 and $51 each. Christopher Rolland, an analyst at Susquehanna, has taken a slightly more cautious approach, placing Arm’s valuation at a fair range of $48 billion to $50 billion, with shares priced at $47 to $50 per share.
Premium Positioning
Although Arm’s valuation may be higher than other chip stocks, it is justified. Susquehanna has assigned a valuation to Arm based on an enterprise value-to-sales multiple of 14 times its expected fiscal 2025 sales. This positions Arm just below Nvidia’s EV/Sales multiple of 15 times, and well ahead of the average multiple of approximately 10 times for similar companies like Qualcomm, Intel, and Advanced Micro Devices.
While some market commentators have expressed doubts about Arm’s ability to achieve a significant premium, it remains poised for success in the IPO market.
Arm’s Growth and Potential
Rolland believes that Arm’s expected compound annual revenue growth of 20% until fiscal 2027, along with improving operating margins, justifies its premium valuation. Despite a sluggish smartphone market, analysts from Susquehanna support Arm’s potential for a more diversified revenue mix, which includes cloud computing and increased market share in the automotive industry.
Core Improvements and Opportunities
Rolland states that Arm’s continuous iteration provides an ongoing opportunity for core improvements. This, in turn, can drive up license fees and chip average selling prices (ASPs).
Risks and Mitigations
There are some risks to Arm’s growth strategy. The company is exposed to China, relying on an independent entity to handle sales. Additionally, the growth of the open-source RISC-V chip architecture poses a challenge, as it is used by companies seeking to avoid paying royalties to Arm. However, Rolland highlights two mitigating factors. Firstly, Arm’s designs come at a fraction of the cost of developing original intellectual property. Secondly, Arm benefits from a global community of software developers who are already familiar with its designs.
In conclusion, the future looks promising for Arm. With its strong growth projections and potential for diversification, the company is well-positioned to navigate challenges and capitalize on emerging opportunities.
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