The Arm IPO: A Look Under the Hood

Just over six years, we wrote a piece titled How to Invest in the Singularity – It’s Near which dissected a talk being given by Masayoshi Son, CEO and Founder of SoftBank. The thesis was quite simple. SoftBank acquired Arm Holdings in 2016 for $32 billion because they believed it would be a critical provider of information for the AI algorithms of tomorrow. At that time, Mr. Son expected to ship 1 trillion IoT chips in the next 20 years with Arm IoT chips commanding an 80% market share. That would allow SoftBank to plan the future direction of IoT which would also influence the direction of AI significantly.

SoftBank’s convictions may have been called into question when they later decided to sell Arm Holding to NVIDIA. Our excitement was short-lived when the deal fell through last year, and here we are looking at an Arm Holdings F-1 statement as the company prepares for the biggest IPO in nearly two years.

Arm’s Fab-u-less Business Model

We’ll typically wait for an IPO to take place before investigating a company, because there’s no guarantee an F-1 filing leads to an IPO. In this case we’d like to look at what’s under the hood before a potentially hyped IPO. At an expected valuation of between $60 billion and $70 billion, Arm would have a simple valuation ratio (SVR) of 22 based on the lower end of that guidance. That’s just above our cutoff of 20, and already showing signs of exuberance. But with a gross margin of (checks notes again) 96% last year, and market leadership across multiple domains, it’s under