In the fast-paced world of technology, major acquisitions or IPOs can send shockwaves through the industry. This redefines industry landscapes and also reshapes innovation roadmaps. One such game-changing event was Nvidia’s announcement of its intent to acquire ARM. This was announced in September 2020 and it was valued at a staggering $40 billion. However, they were met with much scrutiny from regulators and competitors globally. As a result, ARM Holdings explored other opportunities and is slated to go public in September 2023. In this article, we will deep dive into ARM’s background, finances and determine if one should invest?

ARM Holding Background

ARM, short for Advanced RISC Machines, is a British semiconductor and software design company founded in 1990. ARM’s primary business is in the design of Central Processing units (CPUs), particularly in mobile and embedded systems markets. ARM’s architecture is omnipresent, powering billions of devices worldwide, from smartphones to Internet of Things (IoT) devices and automotive systems. It is said that more than 99% of the world’s smartphones are powered by ARM energy-efficient CPUs.

Unlike Nvidia, ARM doesn’t manufacture chips; instead, it licenses its intellectual property (IP) to other companies. This includes the likes of Intel, Apple, Samsung, TSMC which design and manufacture their custom processors based on ARM’s architecture. Arm charges a license fee for their design and collects royalty on every device sold that uses an Arm chip.

ARM Holdings current financial performance

As the world moves increasingly towards AI- and ML-enabled computing, ARM Holdings will be key to this transition. This played a significant role in their 2022 revenue, which saw an increase of 33.3% from the prior year.

Despite a decrease in revenue for 2023, ARM still foresees a strong and healthy growth in their future revenue. They expect their Total Addressable Market to grow at 6.8% CAGR to approximately $246.6 billion by 2025. ARM estimates its chip market share at approximately 48.9%. As the cost and complexity of chip design continues to increase, ARM expects to contribute more research into each chip. This will likely result in higher royalties payout for ARM in the future which will boost its revenue. 

ARM Holdings Past financial performance

In addition to that, its Gross, EBIT and Net income margin has remained relatively stable over the past 3 years. 

ARM Holdings current valuation

Currently, ARM Holdings have shared relatively little information about their financial performance. Hence, a better approach will be to compare its valuation with some of its competitors or partners in the industry.

Looking at the Price/Book ratio, ARM Holdings valuation looks fairly valued as compared to the likes of Nvidia and Apple. However, when comparing via Price/Equity ratio, it seems to be overly valued at current price of $60 as compared to its peers.

Conclusion to buy ARM Holdings

In conclusion, the decision to invest in ARM Holdings at this moment hinges on a complex interplay of factors. While ARM has showcased robust revenue growth, a significant portion of its royalty incomes comes from their older products. These products were mainly released between 1990 and  2012. This poses a risk if the reliance of ARM chips for older products decline.  

In addition, at current valuation, ARM trades at 155x times but lacks in growth forecast as compared to Nvidia.  As such, its peers or competitors seem to be a more attractive investment at this current point of time. It would be more wise to observe ARM revenue over the next few quarters to better estimate its future earnings before investing in it.

Share Disclosure: Currently do not own have any ARM Holdings

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