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Newly listed companies do not enjoy long grace periods. After the hype of initial public offering roadshows, the reality of a company’s first set of quarterly earnings can be a let-down. Slowing growth tripped up Facebook. High losses weighed on Etsy. On Wednesday, chip designer Arm lost steam with downbeat forecasts.
Arm’s IPO encouraged investors to focus more on what the company could become than what it is now. It earns money from licensing fees charged for access to its designs and royalty fees on sales. Its tech is used in nearly every smartphone, but this is a saturated and slowing market. The hope is that expansion into cloud computing, self-driving cars and artificial intelligence — areas that require specialised, more expensive chips — will power future growth.
Excitement around AI infrastructure in particular has been responsible for lifting Arm’s value. Its near $56bn market cap is 40 per cent higher than the amount Nvidia offered three years ago in a cash and stock deal. But at 18 times forecast sales, Arm trails Nvidia’s equivalent valuation.
Based in the UK, listed in the US and 90.6 per cent owned by Japan’s SoftBank, the company has a sprawling footprint. Like Nvidia, its business is also exposed to the geopolitical risks related to the US and China’s tech tit-for-tat. China accounted for about a quarter of Arm’s sales in the last fiscal year.
But such risks have been ignored in favour of the role Arm could play in an AI revolution. So far though, there is little evidence of an AI-related growth spurt. The lumpy nature of licensing deals means revenue in the three months to September 30 beat expectations by rising 28 per cent, but forecasts for the current quarter were underwhelming. It shows up in costs. Arm added nearly 1,000 employees over the past year. Another large licensing deal is needed to raise post-IPO spirits.
