Can Arm’s A.I. Chip Ambition Justify Its Giant IPO Valuation? Investors Weigh In

With a target valuation of up to $54 billion, Arm's IPO could be the largest public listing of 2023.

SoftBank-owned chip designer Arm is expected to make its debut on Nasdaq on Sept. 14. CFOTO/Future Publishing via Getty Images

As investors anxiously wait for Arm’s initial public offering, wary voices emerge tempering expectations for the British software design company owned by SoftBank (SFTBF). On paper, Arm looks like a safe investment. It’s a historically profitable company whose CPU designs are found in nearly every smartphone in the world. However, skeptical analysts  question whether the company’s existing and future business could justify its lofty target valuation of $50 billion.

David Trainer, the CEO of the investment research firm New Constructs, wrote in Forbes Arm’s valuation won’t go any higher and argued SoftBank has artificially inflated the company’s valuation. David Wagner, a portfolio manager at the investment firm Aptus Capital Advisors, told Yahoo Finance Arm won’t live up to the hype and its target price is already too high for the growth the company could see, especially compared to competitors like Nvidia.

Ivana Delevska, the chief investment officer of asset management company Spear Invest, told Observer, while it remains to be seen where Arm’s valuation will fall, she believes current pricing is fair due to Arm’s reliable partnerships with major smartphones manufacturers like Apple, Alphabet and Samsung.

“From a valuation standpoint, you’re always going to have those companies interested and they are always going to provide valuation support,” Delevska said.

Arm’s outspoken commitment to developing artificial intelligence technology with its chips has also been the company’s main pitch for investors, claiming the company is in an ideal position to integrate A.I. in its chip designs. But investors have doubts.

“The real opportunity in A.I. and a lot of the value is in the GPUs (graphics processing units), which is not what Arm does,” Delevska said. “It won’t really be comparable to Nvidia because they just don’t have the same exposure to GPU.”

While Arm did unveil their own line of  GPUs earlier this year, their main product is the architectural designs for CPUs, which may not see the same performance improvements from A.I. for another few years.

But the hype is already taking over. Bloomberg reported Arm’s IPO has been oversubscribed 1o times since its F-1 filing last week, indicating strong demand. Reuters reported Arm is considering increasing the its target price from the previously listed $47-$51 per share. Just today (Sept. 12), the Taiwan Semiconductor Manufacturing Co. (TSMC), the world’s largest contract chip-maker, announced it will invest $100 million into Arm’s IPO.

Arm’s IPO comes at a time when China’s recent ban of iPhones among government officials sparked worries about the tech market’s future. While foreign market anxieties won’t show immediate impact on Arm’s revenue, increasing trade antagonism with China could dissuade investors from hopping onto an already sluggish tech IPO market. About 25 percent of Arm’s sales come from China.

However, Delevska said that fears of aggressive Chinese trade tactics are not likely to hurt Arm as much as it would other consumer-facing companies like Apple. For Arm, which provides blueprints and licensing of its intellectual properties to other companies, she doesn’t see potential Chinese restrictions on smartphones or laptops impacting Arm’s revenue stream.

“The closer you are to the consumer, the more impacted you are,” Delevska said. “If you are providing critical components to Chinese companies, for example, that’s not really going to be all that much at risk, because it’s really not in China’s best interest to find another supplier.”

Arm is expected to list on Nasdaq on Thursday (Sept. 14) under the ticker ARM.

Can Arm’s A.I. Chip Ambition Justify Its Giant IPO Valuation? Investors Weigh In