ARM IPO: Is Masayoshi Son Making a Last Resort or Offering a Good Opportunity for Investors?

ARM, the UK-based chip designer owned by SoftBank Group, has updated its IPO filing and launched an IPO roadshow on Tuesday. The offering is expected to be the largest of the year, seeking a valuation of more than $52 billion. However, there are some voices that raised concerns about whether ARM is a worthwhile investment.

Arm's latest fiscal quarter ended on June 30th saw a 2.5% YoY decline in revenue to $675 million, largely due to slowing demand for smartphones. Net income also fell over 50% YoY to $105 million. Looking further back, Arm's revenue has grown 65% since it was taken private by SoftBank in 2016. While this is slightly better than the industry average, Arm still lags behind leading chip companies.

The company's main sources of revenue are upfront license fees (40%) and royalty income (60%). However, since royalty revenue is on a per-chip basis rather than the more expensive final product, and typically ranges from 1-2% of the selling price of the chip, this revenue stream may not be as profitable as it seems. Moreover, approximately one-quarter of ARM's total revenue is generated from China. However, the company cautions that this revenue source is susceptible to economic and political risks, which could have a detrimental effect on future performance.

Arm designs chips that power approximately 99% of the world's smartphones. However, this dominance in their traditional business leaves limited room for further growth. At the same time, ARM's bargaining power among downstream customers has yet to be proven. Also, it remains to be seen how fast the company develops its business in cloud processors as well as in the automotive sector.

From one perspective, the enthusiasm surrounding AI has considerably diminished in terms of market sentiment, resulting in a weakened catalytic effect and overall sentiment initially baked into its initial public offering.

On another note, analysts are suggesting that the AI boom has the potential to increase demand for server chips instead of those designed for smartphones and home computers which happen to be Arm's areas of focus. Thus, the argument claims that Arm is situated on the periphery of the AI wave and may not have a significant role in shaping its future as a core player.

Furthermore, the uncertainty created by Arm's downstream customers seeking alternative architectures, such as RISC-V, has cast a shadow of doubt over its growth prospects.

Although major players in the industry such as Apple, Google, and Nvidia participated in ARM's IPO, analysts believe that their involvement was mainly for strategic considerations, such as avoiding being excluded by other cornerstone investors. This may not apply to individual investors. Moreover, ARM has invested heavily in research and development to stay ahead of competitors, but this rising spending has yet to result in significant profit growth, which means that individual investors may not have the patience to wait for adequate returns.

Statistics showed that, out of the SoftBank-backed companies still trading, only four IPOs are currently trading above their issue price, while 21 are underwater. The average IPO return across the portfolio is -46%. Here's a closer look at SoftBank's past IPO involvement.