In this biweekly newsletter, Roula Khalaf, the managing editor of the Financial Times, handpicks her preferred articles.
Grace periods are not typically extended to newly listed companies. The initial monthly income figures for these companies often fall short of the excitement generated during the initial public offering roadshows. Twitter faced setbacks due to slow progress, while Etsy grappled with significant costs. Arm, a chip customization company, experienced a decline in momentum on Wednesday amidst gloomy forecasts.
Investors were advised by Leg Offering to focus more on the potential future growth of a business rather than its current state. Leg derives its revenue from royalties and licensing fees for its models, which are widely used across various devices. However, this market is saturated and slowing down. The company anticipates future growth through expansion into areas like cloud computing, autonomous vehicles, and artificial intelligence, which demand specialized and pricier chips.
The excitement surrounding AI infrastructure, in particular, has driven up Leg’s stock price. With a market capitalization close to $56 billion, the company’s value is now 40% higher than what Nvidia had offered in a cash and stock deal three years ago. Nonetheless, Arm lags behind Nvidia in terms of valuation, trading at 18 times forecasted sales.
Headquartered in the UK, Arm has a significant global presence and is predominantly owned by Japan’s SoftBank, with listings in the US. Similar to Nvidia, the company is exposed to political risks arising from the ongoing tech disputes between the US and China. Approximately 25% of Arm’s profits in the previous fiscal year were derived from China.
Despite these risks, investors are optimistic about Arm’s potential role in the AI landscape. However, the evidence of significant AI-related growth is currently limited. While revenue in the preceding three months exceeded expectations by 28% due to sporadic licensing agreements, the projections for the current quarter were underwhelming, leading to a reflection of this in the stock prices. Arm has recently onboarded nearly 1,000 new employees in the past month, signaling a need for substantial post-IPO growth.
