Investors should avoid Arm IPO, New Constructs says

By James Rogers

New Constructs voices concern about Arm's valuation

As Arm Holdings prepares for its eagerly anticipated initial public offering, independent equity research firm New Constructs warns that the valuation is disconnected from the chip giant's fundamentals.

The IPO is expected to value Arm at $50 billion to $54.5 billion on a fully diluted basis. But New Constructs argues that even a valuation of around $49 billion would be wide of the mark.

That valuation would be based more on owner SoftBank Group Corp.'s JP:9434 "self-dealing" in private markets "to manipulate the valuation higher" than on Arm's fundamentals, New Constructs CEO David Trainer said in a note. SoftBank, he said, increased WeWork Inc.'s (WE) valuation prior to the flexible-office-space company's IPO in 2021.

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"After a nearly two-year drought in the IPO market, SoftBank is wasting no time by offering Arm Holdings to the public markets, and at a valuation that is completely disconnected from the company's fundamentals," Trainer wrote. A roughly $49 billion valuation would imply that Arm needs to grow its revenue by over 20% compounded annually every year for the next decade, according to Trainer. This, he said, is a highly unlikely scenario, even for a company like Arm that is profitable and in an industry with plenty of growth potential.

"We believe investors should avoid this IPO, as we see very limited upside ahead, as there are plenty of other companies in the tech sector that offer investors growth, but at a reasonable valuation," Trainer said.

He also warned that, upon completion of the IPO, SoftBank is expected to own between 90% and 91% of Arm's outstanding shares. "As a result, Arm will be considered a 'controlled company'," Trainer added. "As a controlled company, new investors will have no say in determining the outcome of matters submitted for shareholder approval."

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Other issues include the potential of rising geopolitical tensions between the U.S. and China, a country that has accounted for almost a quarter of Arm's total revenue in fiscal 2023.

New Constructs uses machine learning and natural-language processing to parse corporate filings and model economic earnings, although its research has encountered pushback.

Jonathan Swartz contributed.

-James Rogers

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09-13-23 0830ET

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