British chip designer, Arm Holdings, is preparing for a significant initial public offering (IPO), which is expected to be the largest of the year. The company has priced its IPO in a range that would value it at up to $52 billion, according to a filing on Tuesday. This valuation is below a $64 billion calculation following a recent stake sale involving its current owner SoftBank (TSE:TYO:9984).
SoftBank plans to sell about 10% of total shares outstanding in the offering. The IPO will test market appetite for an important technology company in an environment of high interest rates. Despite the lower-than-expected valuation, Arm remains optimistic, as it aims to issue 95.5 million American depositary shares priced between $47 and $51 each.
Arm's technology powers chips inside nearly every smartphone globally. It hopes that several of its partners, including Nvidia (NASDAQ:NASDAQ:NVDA), Apple (NASDAQ:AAPL), and Google-parent Alphabet (NASDAQ:NASDAQ:GOOGL), will invest in its IPO as strategic investors. Such investments could potentially push up the valuation.
However, Arm's exposure to the sluggish smartphone market and the Chinese market have raised questions among analysts about its growth trajectory. Albie Amankona, an analyst at Third Bridge, expressed skepticism about the long-term sustainability of revenue growth and high margins of ARM in a research note on Monday. He predicts a yearly revenue growth of 5-10% for the next five years, followed by a peak and subsequent contraction on a yearly basis.
In its most recent fiscal year, Arm generated $2.68 billion of revenue and net income of $524 million. The company's targeted valuation suggests a trailing price-to-earnings multiple of 92 to 100 times, less than Nvidia's 117 times but significantly higher than other chip makers like Qualcomm (NASDAQ:NASDAQ:QCOM), which trades at a trailing P/E ratio of 15 times.
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