Arm/SoftBank: even an army of underwriters cannot stand up $70bn valuation
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Arm, a company that designs chips, is poised to become the largest public listing in the United States this year. The growing demand for artificial intelligence has positively impacted other chip-related companies as well. It is anticipated that significant clients will support Arm's initial public offering. However, one might wonder why SoftBank, the owner of Arm, has deemed it necessary to enlist the assistance of numerous banks.
Barclays, Goldman Sachs, JPMorgan, and Mizuho, alongside 24 additional underwriters, are spearheading the offering. These financial institutions will be pleased to have this opportunity given the recent scarcity in the market, which caused initial public offering (IPO) proceeds to reach an all-time low in the previous year.
However, the extensive lineup suggests that SoftBank acknowledges its need for support in achieving its goals. Arm is projected to aim for a valuation ranging from $60 billion to $70 billion. If this endeavor proves successful, it would aid the Japanese investment conglomerate in rectifying the substantial losses incurred by its Vision Fund, which experienced a staggering $30 billion deficit in the previous year.
SoftBank has endeavored to establish a lofty valuation. The documentation for the initial public offering discloses an in-house transaction wherein SoftBank obtained the shares owned by its Vision Fund in Arm for a substantial $16 billion, consequently valuing the esteemed chip company at an astonishing figure exceeding $64 billion.
Investors should not pay much attention to this number. Looking at a wider perspective, when considering the average earnings multiple of the industry, Arm's overall value would be approximately $30 billion. This is quite close to the amount SoftBank paid to acquire the company in 2016.
Attempts to promote Arm as an artificial intelligence (AI) company do not imply that it should be appraised on par with Nvidia, the top producer of AI chips. While the sales of AI chips have reached unprecedented levels, Arm's sales have declined during the previous financial year. In reality, Arm's success is intertwined with smartphones, which have experienced a downwards trend since 2016.
China poses the biggest danger to the value of Arm. The export regulations imposed by the United States and the United Kingdom put at risk the revenues derived from China, which account for almost 25% of Arm's overall revenue. Moreover, Chinese firms have been making substantial investments in the advancement of RISC-V, an open-source chip design framework that could potentially compete with Arm's designs.
Differences in value assessments between SoftBank and the wider financial markets have been a well-known occurrence. Take, for instance, WeWork, where SoftBank's internal reassessments of its investments have continuously worried shareholders.
SoftBank's stock has plunged by over 33% since reaching its highest point of 2021. The CEO, Masayoshi Son, asserts that it is undervalued compared to its net asset value. However, his exaggerated estimation of Arm's worth implies that he is mistaken.
