Is the premium Arm share price warranted?

Does the Arm share price deserve to be be trading at a premium following its post-IPO surge last week. Dr James Fox takes a look.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Happy young female stock-picker in a cafe

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Arm (NASDAQ:ARM) share price surged after a successful IPO last week. It rose from $49 and settled just above $60 in Friday trading. The IPO, the largest since Rivian two years ago, raised $5bn for SoftBank.


SoftBank’s acquisition of Arm Holdings in September 2016 for approximately $32bn aimed to position the investment giant as a major player in the technology and semiconductor industry.

The acquisition allowed it to leverage Arm’s expertise in microprocessor design and semiconductor intellectual property (IP), which are integral to various bits of tech, including smartphones and IoT devices.

Arm primarily makes money by licensing its semiconductor and IP technology to various companies in the tech industry.

It earns revenue through licensing fees and royalties paid by manufacturers that use Arm’s tech to design and produce semiconductor chips for a wide range of devices, including smartphones, tablets, IoT devices, and more.


Reports suggest that the Arm IPO was oversubscribed by 10 times, so no surprise that there was immediate upward pressure on the share price.

However, at Friday’s closing price, the fabless semiconductor company looks very expensive. Arm trades with a price-to-sales ratio of 23 times. Normally, a price-to-sales ratio above 10 is considered high.

When we look at the forward P/S ratio, Arm appears to be trading in line with industry darling Nvidia — around 20 times. Meanwhile, figures suggest Arm is trading around 150 times earnings.

Investment prospects

Since SoftBank’s acquisition of it, Arm has increased sales by over 70%, riding the wave of global smartphone adoption. In 2016, just less than half the global population had a smartphone. Today that figure is 85%.

For cautious investors, Arm offers the chance to invest in a well-established semiconductor designer known for its profitability and growth over the past decade.

While the smartphone market might be reaching maturity, Arm holds 99% of the market, longer-term investors may hope to see the firm build market share in high-growth segments like artificial intelligence (AI). This is projected to grow at a 37% CAGR through to 2031.

Moreover, there’s room for growth in the automotive sector where it holds a 41% market share. The connected car segment is expected to grow at a 15.7% CAGR through 2027.

Little room for error

Arm’s valuation leaves little room for error though. Firstly, this is particularly concerning given that sales and profits actually declined over the past year.

Investors may also be concerned about tough competition across various sectors. Companies like Qualcomm offer cost-effective, open-source RISC-V architecture. Potentially, this could erode Arm’s position in the smartphone and IoT market.

Equally, investors should consider the impact of trade restrictions. Arm is prohibited from selling high-margin products like the Neoverse V-series CPU IP in China.

My view

While it’s an exciting company with a commanding share of the smartphone market, it may not be the most exciting investment opportunity, I feel. It’s phenomenally expensive, and lacks the clear growth trajectory of Nvidia.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Fox has no position in any of the shares mentioned. The Motley Fool UK has recommended Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

2 mouthwatering FTSE growth stocks I’d buy and hold for 10 years

Growth stocks purchased today could be the gateway to many years of capital growth and returns. Here are two picks…

Read more »

Investing Articles

Can the IAG share price really be as dirt cheap as it looks?

While most shares have recovered since the Covid days, the IAG share price is staying stuck to rock bottom. Surely…

Read more »

Investing Articles

BAE Systems shares are flying! Have I missed the boat?

Sumayya Mansoor looks into whether or not BAE Systems shares are still a good buy for her portfolio after the…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

1 heavyweight FTSE 100 share I’d buy as London retakes its crown

Some Footsie firms are extremely large, but that doesn't mean they couldn't get even bigger. Here's one such FTSE 100…

Read more »

Investing Articles

I’d buy 5,127 National Grid shares to generate £250 of monthly passive income

With a dividend yield of 6.5%, Muhammad Cheema takes a look at how National Grid shares can generate a healthy…

Read more »

Investing Articles

The FTSE 100’s newest member looks like a no-brainer to me!

This Fool explains why she sees the newest member of the FTSE 100 as a great opportunity after its recent…

Read more »

Investing Articles

Empty Stocks and Shares ISA? Here’s how I’d start earning a second income from scratch

Like the thought of earning extra cash tax free? Our writer explains what he'd do to begin earning passive income…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

No savings at 25? I’d start by investing £3k in these 3 red-hot FTSE 100 shares

Harvey Jones thinks these three FTSE 100 stocks would be a great way to kickstart a portfolio of UK shares.…

Read more »