Arm Holdings
is set to be the market’s next big chip stock as it gears up for its public listing. The model for success is Nvidia but Arm is yet to prove that it is a leading player in artificial intelligence.
Arm’s regulatory filing ahead of its planned initial public offering on the Nasdaq hinted at its AI ambitions. It also disclosed that it was valued at around $64 billion in a recent stake sale involving its current owner
SoftBank
(ticker: 9984.Japan).
The implied potential valuation is a hefty one for a company that generated $2.68 billion of revenue in its most recent fiscal year. It would imply an even richer price-to-revenue ratio than fellow semiconductor company
Nvidia
(NVDA) which trades at around 45 times its most recent annual sales.
However, there are reasons to question whether Arm can garner a similar valuation to Nvidia, the market’s current favorite play on the growth of AI.
Whereas Nvidia sells graphics-processing units which have become the tool of choice for training AI systems, Arm’s core strength is licensing designs for central processing units, or CPUs.
Arm’s CPUs are already used in running AI applications, especially in smartphones. While the wave of investment in AI technology has supercharged spending on chips for data centers, it’s not clear how far or quickly that will translate to spending on higher-end chips for devices such as computers and smartphones.
Meanwhile, Arm is heavily exposed to the smartphone market. Independent analyst Richard Windsor, who publishes Radio Free Mobile, wrote on Tuesday that Arm’s profile looks more like smartphone chip specialist
Qualcomm
(QCOM) than Nvidia. While Nvidia stock has rocketed this year on AI excitement, Qualcomm has traded almost flat, held back by concerns about slowing smartphone sales.
Windsor also said there were potential concerns about Arm’s exposure to China. The company’s sales in the country are handled by Arm China, a separate company which operates independently and is majority-owned by Chinese investors. Arm has a minority interest in the Chinese business via SoftBank.
“Arm’s risk profile in China is as great if not greater than Qualcomm’s especially when it comes to geopolitical sensitivities around the transfer of intellectual property into China,” Windsor wrote.
Arm said in its filing that China accounted for around 25% of its revenue in its most recent fiscal year, up from 18% the preceding year. In comparison, Nvidia generated 21% of its revenue from China over the last 12 months, according to FactSet.
“In a downcycle year for smartphones and semis, [Arm’s] flat year-on-year revenues seem fine, while margin expansion suggests R&D/ headcount investments are paying off now. More interestingly though, China revenue concentration is rising—an increasingly risky backdrop given geopolitics,” analysts at Macquarie wrote in a research note.
Write to Adam Clark at [email protected]
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