ARM IPO and AI Boom

The ARM IPO (Initial Public Offering) is currently valued at $54.5 and how this plays out will have implications beyond this IPO.  This will potentially affect the AI Boom (or Hype).

Softbank, the Japanese investment company, is only selling about 10% of the shares outstanding.  ARM used to be a public company before the acquisition by Softbank.  In fact, Nvidia wanted to buy the company for $40 Billion but the SEC stepped in to stop this deal.  Why is Softbank selling?  It needs to raise money to cover the very poor investment in WeWork Inc.

Essentially, ARM is another bet on the AI Boom, thus it will be closely watched today as it is seen as barometer of market sentiment in the high-tech sector.   Trading today is important but so is trading in the next 2 to 3 months.  The danger is that the hype is above the fundamentals of the company and it may not fare so well after it starts trading today.  That could in turn impact market sentiment on AI.

ARM Valuation

At $51 a share, it is at the top range of the $47 – $51 range.  We think it is overpriced.  Thus, likely to dissapoint at sometime in the immediate future.  What normally will happen is price could surge in the first day allowing for quick profits and after this the stock will not be able to meet the high expectations thus will fall.  At a valuation of over $54 Billion, it would be trading at 20 times earnings compared to 12 to 15 for the competition.  It does howerver have a stong position in the market but also exposure to the US China geopolitical risk.

In our view, the US China geopolitical risk is being underpriced and ARM be a target in the future.