While Arm Holdings has not even completed its long-awaited initial public offering, the semiconductor design company has received a 1st Buy rating from the Street.
Arm, which is wholly owned by SoftBank Group (ticker: SFTBY), is expected to price shares at $47 to $51 per share in an initial public offering on Thursday morning, trading under the stock symbol ARM. At the top of the range, the company’s market capitalization would be $52 billion. SoftBank bought Arm for $36 billion in 2016; The company’s sale to Nvidia (NVDA) for $40 billion in cash and stock in 2022 was finalized in the face of intense regulatory opposition. After the offering, SoftBank will continue to hold about 90% of Arm shares.
NewStreet Research analyst Pierre Ferrago isn’t waiting to see what happens with the IPO. On Wednesday, he had coverage on Arm shares with a buy rating and a $59 price target. “Arm’s fundamentals have not changed in the past seven years: the company has benefited from growth in semiconductor content in all end markets, driving increased adoption of its IP,” he writes.
ARM does not sell or manufacture chips; Instead, it provides chip designs to a range of semiconductor manufacturers. The company is known for providing the processor design used in basically every current smartphone.
Ferragu writes that there are three main reasons he is optimistic about Arm’s future prospects.
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First, he says the company has a “high-quality financial model,” mostly in the form of royalty payments from chipmakers. “The additional royalty income is pure profit, resulting in rapid margin expansion, minimal reinvestments, and free cash flow growth,” he writes.
Secondly, he believes the IPO is well-timed from an investor’s perspective, as the company’s growth should accelerate from here. “IPO is at a low level in the smartphone market, with penetration accelerating in networking, cloud and automotive, and in the early days of the transition to the v9 architecture,” the company’s latest chip design said.
Third, Virago asserts that the valuation is attractive. It is estimated that Arm will be worth $82 billion in 2026, based on a multiple of 27 times equity revenue and 40 times pre-tax earnings, with equity revenue growing in midlife. While 2022 revenue was flat compared to 2021 amid a downturn in the mobile phone market, he believes the company can grow at least by low double digits on average over the next five years. It is believed that pre-tax profits could triple over the same period given the additional revenue costs.
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The price for Arm’s IPO is expected to be set after the close of trading on Wednesday, with the first trading occurring sometime Thursday morning.
Write to Eric J. Savitz at [email protected]
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