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Arm is commencing its initial public offering roadshow in New York on Tuesday amidst skepticism from top fund managers about SoftBank, its owner, justifying a valuation of up to $55 billion.
James Anderson, a renowned tech investor from the UK, has expressed doubt that the UK chip designer and Japanese conglomerate will be able to convince potential backers of its growth prospects this week. According to Anderson, Arm’s role as a critical player in crucial growth markets such as artificial intelligence and cloud computing is unclear.
Although Arm dominates the market for smartphone processor designs, it plans to list on Nasdaq after reporting stagnant revenues for the previous year and a 50% decline in profits for its most recent quarter due to the decline in the mobile market. If successful, Arm’s IPO will be the largest in the US since November 2021.
“I’ll be very interested to see how they sell a compelling growth story at this stage,” Anderson told the Financial Times. “Despite being an important company for the tech ecosystem, they may find it more challenging than they anticipated.”
Based in Cambridge, Arm is aiming for a valuation range of $50 billion to $55 billion, as reported by the FT. This target is lower than the $64 billion valuation just a month ago in a transaction with SoftBank’s Vision Fund, a $100 billion Saudi-backed investment vehicle managed by the Japanese conglomerate.
Another prominent investor who evaluated the Arm IPO also finds it unconvincing. The main concern is the company’s growth rate going forward. Even with an optimistic outlook, the valuation does not make much sense, and it’s difficult to justify a valuation above mid-$40 billion.
A third fund manager, who recently had discussions with senior Arm management, shares the same concerns. Even a $40 billion valuation seems generous. According to the fund manager, Arm demonstrated that it was worth more than $35 billion, but not higher than $40 billion.
Anderson retired from Baillie Gifford, based in Edinburgh, last year and has recently joined Lingotto Investment Management, owned by the Agnelli family holding company Exor. He is launching a fund focused on innovation in both public and private markets.
During his time at Baillie Gifford, Anderson and his team opposed SoftBank’s £23.4 billion takeover of Arm, but they couldn’t garner enough shareholder support to keep Arm independent.
“It seems like Arm missed out on many opportunities in the past five years,” Anderson says. Although the 2016 deal was a big bet on Arm assisting SoftBank in becoming an IoT leader, “the wave that should have been caught was undoubtedly the cloud,” he added.
Arm claims to have a 10% market share for data center processors, but it doesn’t have the scale of Intel or the rapid growth fueled by AI like Nvidia.
Anderson further stated, “It’s not clear that Arm plays a critical role in most areas of expansion. I don’t see it as having a particular strength in AI-related developments.”
There are also concerns among potential investors regarding Arm’s exposure to China, especially after the company highlighted “significant risks” in a region that contributes around a quarter of its revenues.
Anderson doubts whether Arm can maintain its independence and hold in China over time.
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