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The Rise (and fall) of ARM and its impact on the Semiconductor Industry

By: Shayan Mukherjee

After it’s market debut on the NASDAQ stock exchange on 14th September 2023, Arm Holdings’ share price quickly escalated to over 25% of it’s initial $51 USD, resulting in a $65 billion valuation. However, in the ensuing week, it has once again dropped back to its IPO price.

The digitalization of our world and the dependence of our community on readily available technology is merely growing day by day. Whether it is to facilitate the ease of communication over long distances, allow for easier access to information and entertainment, or to perform the most basic of functions, we would be rendered impotent without phones, laptops, tablets, etc. These devices have dramatically increased the productive capacity of economies, leading to more efficient manufacturing processes, more flexible working hours, and a more geographically mobile labour force. Perhaps most importantly, it has paved the way for globalization, allowing us to remain connected across borders and to travel thousands of miles in mere hours. You wouldn’t even be reading this article if not for these fascinating devices.

We owe the functionality and capability of our devices to tiny units at the core of these technologies called semiconductors. These components control and manage the flow of electrical current within our electronics and is an integral part of computing hardware. Therefore, as a result of its utility, semiconductors are incredibly valuable commodities. To put how priceless they are into perspective, the Taiwan Semiconductor Company (TSMC) experiences a 60% rise in net income from 2021 to 2022, according to their annual report. They are based in China, due to the proximity to the major electronics manufacturing plants of tech giants like

Apple and Huawei, and their position is the primary reason dissuading China from invading and reclaiming Taiwan. China and the USA are also involved in a trade war regarding access to semiconductor technology. The semiconductor industry is of such economic importance that it is considered as a deterrent to military action!

On September 14th, the IPO for Arm Holdings, a British semiconductor and software design company owned by the parent corporation SoftBank Group came through at $51 and, over the course of the day, the share price rocketed by over 25%. While investors all around the world were encouraged by the interest shown in the new stock and interpreted the day’s proceedings as signs of change in the usually stagnant market for new IPOs, the most profound impact of the demand for shares of Arm could be on the semiconductor company.

The prevailing belief is that, assuming this growth is sustained, investors would recognise the continued financial potential of the semiconductor industry and further support start-ups in this market. This would have widespread economic benefits, as tech companies would have easier access to semiconductors at a lower cost (due to the increase in supply caused by a rise in the number of firms producing the commodity), allowing them to ramp up production and maintain high profit margins. This could have a positive knock-on effect to consumers, who benefit from an increase in the quantity of devices in the market and, once again, easier access to these devices. Arm holdings have stated that they are looking to revolutionise the semiconductor and software design industries through the introduction of artificial intelligence, further increasing efficiency and productivity.

However, it must be acknowledged that it is still early days for Arm and the full impact of the IPO is yet to be seen. Markets are notoriously temperamental, particularly for newer IPOs, whose share prices ride the wave of initial excitement from speculators: as of 22nd September, the share price of Arm has returned to its initial price and analysts at the Susquehanna financial group have warned investors to not rush regarding the purchase of the stock.

According to the financial experts Rolland and Hosseini, the market for semiconductors is currently stagnant and, eventually, this will be reflected in its valuation.

“Given their slowing end markets, we believe that ARM should therefore trade at a valuation discount to the stock of the last decade”, one of their researchers wrote. They suggest that Arm would have to fulfill their promises to expand into new areas like artificial intelligence and charge premium royalties on the use of its intellectual property (i.e., their original inventions) to justify a higher valuation.

As the situation develops with the stock of ARM Holdings and the semiconductor industry as a whole, its full impact is yet to be completely realised.

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