While Arm Holdings hasn’t even completed its much-anticipated initial public offering, the semiconductor-design firm nonetheless has picked up its first Buy rating from the Street.
Arm, which is wholly owned by
(ticker: SFTBY), is expected to price shares at $47 to $51 each in a Thursday morning initial public offering, trading under the ticker symbol ARM. At the top of the range, the company would have a market value of $52 billion. SoftBank bought Arm for $36 billion in 2016; a deal to sell the company to
(NVDA) for $40 billion in cash and stock was terminated in 2022 in the face of stiff regulatory opposition. After the offering, SoftBank will continue to hold about 90% of Arm’s shares.
NewStreet Research analyst Pierre Ferragu isn’t waiting around to see what happens with the IPO. On Wednesday, he picked up coverage of Arm shares with a Buy rating and $59 target price. “Arm’s fundamentals have not changed in the last seven years: The company rides growth in semiconductor content across all end markets, driving up adoption of its IP,” he writes.
Arm does not sell or make chips; instead it provides chip designs to a range of semiconductor manufacturers. The company is best known for providing the processor design used in essentially every current smartphone.
Ferragu writes that there are three primary reasons he is bullish on the outlook for Arm.
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One, he says that the company has a “high-quality financial model,” mostly in the form of royalty payments from chip makers. “Incremental royalty revenue are pure profits, resulting in fast margin expansion, negligible reinvestments, and free-cash-flow growth,” he writes.
Two, he thinks the IPO is well timed from an investor’s point of view, in that the company’s growth should accelerate from here. “The IPO happens at a low in the smartphone market, as penetration accelerates in networking, cloud, and autos, and in the early days of the migration to the v9 architecture,” the company’s latest chip design.
And three, Ferragu contends the valuation is attractive. He estimates that Arm will be worth $82 billion in 2026, based on a multiple of 27 times royalty revenue and 40 times pretax earnings, with royalty revenue growing midteens. While 2022 revenue was flat with 2021 amid a downturn in the mobile-phone market, he thinks the company can grow at least in the low double digits on average over the next five years. And he thinks pretax earnings can triple over the same period given the minimal costs to incremental revenue.
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The Arm IPO is expected to price after the close of trading on Wednesday, with the first trade sometime Thursday morning.
Write to Eric J. Savitz at eric.savitz@barrons.com
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Read More: Arm Stock Gets Its First Buy Rating Even Before the IPO
