Arm's IPO: The semiconductor designer's future looks bright

British chip designer Arm saw its share price jump 20% on the first day of trading on the Nasdaq stock exchange in New York on Thursday.

The company, which is a world leader in smartphone chip design, is owned by the Japanese tech investor SoftBank who sold 95.5 million American depositary shares — around 10% of Arm's shares. SoftBank will retain ownership of the remaining 90% of the company's stock that is now valued at about $61 billion (€57.29 billion).

Though Arm itself may be a lesser-known brand, many people use products that incorporate the British chip designer's know-how every day when using cellphones, watching television, operating washing machines or driving.

Arm was founded 33 years ago as a joint venture between Acorn Computers, Apple and VLSI Technology. When Apple pulled out a few years later, there was little indication that the small company would become a key player in digitization. 

This is because Arm creates the design for semiconductors that are built by high-tech companies such as Apple and Samsung. In return, the Cambridge-based inventors receive license fees. Arm is akin to the Switzerland of the semiconductor industry: a neutral player that cooperates with everyone and does not commit to any alliance.

Return to the stock market

The jump to Wall Street marks the company's return to the trading floor, having previously been listed from 1998 to 2016 on the Nasdaq technology exchange. After acquiring Arm in a $32 billion takeover in 2016, Japan's SoftBank Group — a multinational investment holding company known for its stake in the Chinese internet giant Alibaba, among other things — took the share off the price list.

In 2022, the planned sale of Arm to the US chip company Nvidia for about $40 billion made headlines before US regulatory authorities scuppered the deal, citing competition concerns. Clients let out a sigh of relief, because the merger with Nvidia, a trillion-dollar corporation, would have spelled the end of Arm's neutrality.

Now, SoftBank boss Masayoshi Son is making a new attempt to reap the rewards of his investment with the IPO in New York. The SoftBank boss is only putting a 10% stake in Arm on the stock market. The IPO was more than 10 times oversubscribed — meaning that there were more than 10 interested parties for each share to be issued. The issue price was set at $51 on Wednesday evening, which is at the upper end of the price range. 

What does Arm do?

The software for Arm's fast and extremely economical microcontrollers and chip designs is supplied by the German software subsidiary Keil, which has been part of Arm for almost 20 years. The development of the Cortex-M3 microcontroller in 2004 revolutionized the global process of digitalization. These extremely cheap semiconductors control virtually all everyday applications as single-chip computer systems via a processor and peripheral functions, as well as working or program memory.

They make printers, keyboards and office scanners work and serve as control units for airbags and Anti-Lock Braking Systems in cars. They are used for debit and credit cards, as well as in remote controls, consumer electronics devices and medical technology.

About 17 billion Cortex microcontrollers go on sale every year, and Arm collects license fees for every single one of them.

Arm manager Chris Shore, who has been with the company for decades, sums it up: "32-bit processing power for under a dollar changed everything." That's because it was suddenly possible to throw everyday devices at the mass market with digital controllers that cost pennies.

The company's design is also behind Nvidia's highly complex graphics chips for artificial intelligence applications and can also be found in Apple's iPhone processors and Samsung's Galaxy phones.

Arm reserved over $700 million worth of shares in the IPO for purchase by its biggest customers, including Intel, Apple, Nvidia and Samsung. The Taiwanese chip giant TSMC has already confirmed that it will buy a tranche worth $100 million.

Arm and AI

It will be interesting to see whether Arm can also profit from the growing market for deep learning and AI, as CEO Rene Haas has promised. That's because, unlike central processing units in conventional computing, the immense computing power in AI applications is driven by graphics chips, in which Nvidia currently has an advantage.

The licensing fees from which Arm makes the most money have continued to flow recently, with chip royalties rising to $1.68 billion in the last fiscal year, up from $1.56 billion the year before.

One area that investors are monitoring closely is Arm's exposure to China. Geopolitical tensions with the United States and an expansion of US supply bans on Western high-performance chips could hurt Arm's business. China accounted for nearly a quarter of the company's $2.68 billion in sales volume for the fiscal year that ended in March.

Arm boasts that its technology reaches 70% of people globally through use in all sorts of everyday products and powers 99% of all smartphones worldwide. Arm has 1,000 partners and has provided the design for 100 billion chips sold. Each year, Arm customers ship an average of about 20 billion chips based on Arm technology.

"Nobody disputes that this is a quality company that has substantial sales, substantial profits," said Jay Ritter, a professor specializing in stock launches at the University of Florida. "The question is about future growth potential."

This piece was originally published in German.