Newly listed companies face a challenging transition from the excitement of IPO roadshows to the harsh reality of their first quarterly earnings. This transition has proven to be a stumbling block for tech giants like Facebook and Etsy, and now, chip designer Arm is facing its own set of challenges.
Betting on AI’s future growth
Arm’s IPO sparked enthusiasm among investors who were captivated by the company’s potential rather than its current standing. With revenue streams primarily from licensing fees and royalties on sales, Arm dominates the smartphone market.
However, the saturation and slowdown in this sector have prompted the company to explore new avenues, such as cloud computing, self-driving cars and artificial intelligence (AI), to fuel future growth.
Role of AI in Arm’s ascension
The excitement surrounding Arm’s development into AI infrastructure has been a major factor in boosting its market value. With a market cap of nearly US$56 billion, the company has witnessed a 40 percent increase in value compared to Nvidia’s offer three years ago. However, despite this surge, Arm lags behind Nvidia’s valuation, standing at 18 times forecasted sales.
UK-based, US-listed, SoftBank-owned
Arm, headquartered in the UK and listed in the US, operates with a complex ownership structure, with 90.6 percent owned by Japan’s SoftBank. This intricate setup exposes the company to geopolitical risks arising from the ongoing tech tit-for-tat between the US and China. Approximately a quarter of Arm’s sales in the last fiscal year came from China, adding an additional layer of uncertainty.
AI-related growth challenges
Despite the optimistic outlook on Arm’s role in the AI revolution, there is scant evidence of a significant growth spurt in this direction. While revenue for the three months ending 30 September surpassed expectations with a 28 percent increase, the forecasts for the current quarter fell short. This discrepancy is reflected in the company’s escalating costs, including the addition of nearly 1,000 employees over the past year.
Elevating post-IPO targets
To reinvigorate post-IPO confidence, Arm faces the imperative need for another substantial licensing deal. The current landscape demands strategic moves to align with the evolving tech industry and secure its position amidst fierce competition.
In conclusion, Arm’s journey post-IPO unfolds as a narrative of potential versus reality, with the company at a crossroads, seeking the next big opportunity to solidify its standing in the ever-evolving tech sector.