Is Arm's valuation before the IPO only slightly over $50 billion, cheaper than Nvidia?

Arm Holdings is about to undergo a US IPO, which will test the market's appetite for an important technology company. However, its target valuation suggests that it does not expect to become the "next NVIDIA".

According to sources cited by The Wall Street Journal, the valuation of the UK chip design company Arm for its Nasdaq listing is between $50-55 billion, with an IPO price range of $47-51 per share. SoftBank may still decide to increase the IPO price range before the IPO, depending on demand.

Arm officially submitted its IPO application last month and plans to list on the Nasdaq Global Select Market under the stock code "ARM". The roadshow for this IPO is expected to take place after the US Labor Day holiday.

Lower valuation than NVIDIA

However, it will still be the largest IPO of the year and an important indicator of investor interest in large technology companies going public during a period of high interest rates. This valuation still indicates optimism for Arm.

Arm's revenue for the most recent fiscal year was $2.68 billion, with a net profit of $524 million. Based on historical performance, this implies a price-to-earnings ratio (P/E ratio) for Arm between 95 and 105, which is lower than NVIDIA's historical P/E ratio of 117.

However, compared to other chip manufacturers, Arm is still significantly overvalued, for example, Qualcomm has a historical P/E ratio of 15.

Doubts about growth potential

Past valuations do not tell the whole story.

Arm's technology powers chips in almost all smartphones, and the company hopes that several of its partners will invest in its IPO as strategic investors.

According to Reuters, NVIDIA, Apple, and Google's parent company Alphabet are among the companies signing investment agreements. This could push up the valuation.

However, strategic investments that make sense for Arm's customers may not make sense for individual investors. Analysts have questioned Arm's growth trajectory due to its business in smartphones and the Chinese market.

"Our analysts are skeptical about the long-term sustainability and high-profit margins of Arm's revenue growth. They expect Arm's annual revenue growth rate for the next five years to be 5-10%, followed by a peak and then annual contraction," wrote analysts from Third Bridge in a research report on Monday.