Arm F1, and IPO Prospects

August 28, 2023 / Ben Bajarin

This summary is from Episode 31 of The Circuit, which analyzed the Arm F1 filing.


Chip design firm Arm Holdings recently filed for an initial public offering (IPO), marking a return to the public markets after being acquired by SoftBank in 2016. Arm licenses processor architectures and chip designs to major semiconductor companies like Qualcomm, Apple, and Samsung.

Arm’s business model relies heavily on licensing fees from chipmakers who use its designs in their products. This licensing-based approach leaves Arm exposed to fluctuations in the semiconductor market, especially the smartphone industry where its designs dominate.

According to a recent podcast discussing Arm’s IPO filing, the company gets around 24% of its licensing revenue from China. Collecting payments from Chinese firms has been challenging historically. Revenue is also concentrated in just 5 main customers, so losing any one of them could significantly disrupt Arm’s financials.

SoftBank will retain control of Arm’s board post-IPO and take all the IPO proceeds, raising corporate governance concerns. The rumored IPO valuation of $64 billion also appears high given Arm’s revenue concentration issues and unproven new growth initiatives.

If Arm’s stock stumbles after the IPO, it could dim prospects for other semiconductor IPOs like Ampere Computing. Investors will likely judge the entire chip startup space based on how Arm’s shares perform initially.

Arm and SoftBank must balance setting a high IPO price to maximize exit value against pricing reasonably to build credibility with public investors. But Arm’s dependence on a few large customers in the mature mobile market may cap its potential for expansion.

Expanding beyond mobile into new segments like servers, automotive, and IoT has been a gradual process. Arm’s new CPU subsystem licensing model could accelerate growth by capturing the value of high-performance cores. But existing licensing deals with top customers present obstacles to raising rates rapidly.

In conclusion, Arm’s IPO will test whether a licensing-focused chip firm can thrive as a standalone public company in today’s semiconductor landscape. While a successful IPO could pave the way for more chip startup public listings, a disappointing stock performance would likely hamper financing options for other players eyeing IPOs.

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