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.