Arm's return to the stock market had a spectacular start, despite all the naysayers. The market capitalization right from the start reached the same value as it was previously assigned to the company in an internal transaction with Softbank. This was likely influenced by the fact that the internationally well-respected consortium that made every effort to ensure the year's largest IPO would be a success, especially for a technology company. They set the offering price in a way that resulted in a high oversubscription and allowed for significant gains for subscribers. Furthermore, a number of prominent anchor investors, as part of an already extremely limited free float, are likely to support the stock's price in the long term.
However, this may well be necessary. Because experts have no doubt that Arm is now being valued extremely ambitiously. The initial market capitalization is more than 20 times the revenue of the past year and 54 times the operating profit. Such a valuation could only be justified for a company that is advancing at a rapid pace in its business. In contrast, Arm has recently been more or less stagnant. The main reason for this is the declining smartphone market and the still significant dependence of the chip designer on this established core business, which the company has virtually monopolized. Furthermore, while the sale of chip blueprints is highly profitable, it still captures only a fraction of the value chain in this key sector. The big chunks are claimed by technology giants like Qualcomm or Nvidia.
Substantial progress may be lacking
Finding new growth areas for Arm given this positioning is a challenge that the company's management was well aware of even before Softbank's acquisition in 2016. Arm is not an example of the merits of the often highly praised "going private" approach by financial investors. Private ownership is often touted as the best way to address fundamental challenges associated with transforming a company. In contrast, continuous reporting requirements and scrutiny from a broad audience in the stock market are considered as a disadvantage, because investors often lack an understanding of investment and loss phases or other significant changes in companies associated with greater risk. For this reason, a certain level of maturity in the business model is expected from (technology) startups. This maturity should be apparent in the hope of revenue and profit growth before they can venture into going public.
Seven-year private interlude
In this context, Arm's approximately seven-year private interlude appears more as a poor performance than a success story. While innovative concepts such as opportunities in the "Internet of Things" or the current widespread fascination with artificial intelligence easily roll off the tongue of "visionary" Masayoshi Son, specific developments by Arm in these areas remain unclear. There is a concern that substantial progress may be lacking, particularly since the management's initial approach to achieving notable revenue growth seems to revolve mainly around increasing prices for their existing products.
Apparently, Arm must now undertake innovations on the product side and crucial steps in evolving the business model while under the scrutiny of the general public. Softbank's perceived contribution as a private owner appears to be more like financial engineering, which has a significant track record in take-privates and tends to discredit private investments over time. Short-term pre-market valuation rounds have been used as a means to achieve the desired return for the previous owners. Nevertheless, this approach has not proven favorable for investors, as seen in the notorious cases of prominent startups shortly before their IPOs. Arm is not a startup, but shareholders could potentially face similar outcomes.