ARM Holdings PLC: A Dominant Player in the Semiconductor Industry

ARM Holdings PLC (NASDAQ:ARM), founded in 1990 as a joint venture between Acorn, VLSI, and Apple Computer, is making a big splash in the market again with its recent initial public offering (IPO). After a failed takeover by Nvidia, ARM has regained its position as a publicly traded company, and it is garnering a lot of attention. This IPO is the largest of 2023 so far, as there is immense excitement surrounding ARM’s highly sought-after semiconductor chips, which are used by industry giants like Apple and Samsung.

ARM Holdings PLC is a global leader in supplying power-efficient CPUs, which are used in 99% of smartphones worldwide, according to its S1 filing. Its chips are not only used in iPhones but also in other Apple products like iPads, Macs, and potentially upcoming devices like VR headsets. The company also supplies chips to Samsung for its Exynos processors, although Samsung plans to develop its own chip in the future.

ARM processors are not limited to smartphones and tablets. They are also used in Internet of Things (IoT) devices, wearable devices such as the Apple Watch, smart home devices, and even in the automotive sector. The versatility of ARM processors extends to other applications like Amazon Web Services’ custom Graviton chip and the Fugaku supercomputer in Japan, the world’s fastest supercomputer in 2020.

ARM has received significant investments from anchor investors like Intel, Apple, and Google. These partnerships and investments signify the industry’s recognition of ARM’s dominance and its importance in the semiconductor market. Intel’s Senior VP of Intel Foundry, Stuart Pann, emphasized the importance of working with ARM, stating that if a company is not working with ARM, it cannot be a provider of foundries, indicating Intel’s commitment to the business. ARM’s financial performance has been solid, with a super gross margin of 96%, operating margin of 25%, and a healthy balance sheet with $2.2 billion in cash and short-term investments.

Valuing ARM Holdings PLC is a challenging task. While it has a price-to-sales ratio of 23 compared to cheaper ratios for competitors like AMD and Intel, it is worth noting that Nvidia, which attempted to acquire ARM, trades at a higher ratio. The IPO price of ARM initially planned at $52 billion is now trading at close to $60 billion, indicating a possible slight overvaluation.

Overall, ARM Holdings PLC is a dominant force in the semiconductor industry. Its long-term partnership with Apple, investments from major players, and strong financial performance make it an attractive company. However, investors should consider the current valuation and wait for a potential pullback before making any investment decisions.

– GuruFocus