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Comment by mrweasel | Hacker News Reader

I know it says “more” than $32B but isn’t that a little low if Softbank paid $31B?

Neither Softbank nor Nvidia care what I think, but I would feel better if the buyer of ARM wasn’t a company with a existing chip business.

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No, if anything it's overvalued. Previous year's profit was just over $400m. At a 10x multiple that's a $4bn price tag. If you go the year before it was over $600m, which at a 10x multiple is $6bn. Even a crazy 30x multiple would only be $18bn. Softbank massively overpaid, which is why Softbank is SELLING Arm and other companies, because they racked up massive debt.

Revenue is the best indicator for value, not profit which is artificially driven down for tax purposes.

Free cash flow is better than revenue - you can play around with accruals in unsavory ways that are harder to pull off with cash.

Neither is a great indicator for companies that are experiencing significant growth. ARM Holdings has nearly tripled revenue over the past decade. So you have to weight future growth, as well as potential future market opportunities.

ARM + nVidia can be a powerhouse combo, especially in the cloud/server market.

NVidia is already an ARM licensee. What does owning ARM holdings give them besides a massive amount of debt? They could license everything ARM owns for decades for less than this buyout would cost.

ARMs growth has petered out, its market is large and mostly saturated. PCs and servers won’t ship a fraction of the CPUs mobile does.

That's just silly, Wal-Mart would be the most valuable company (while being far from the most profitable) if it held true.

I don't think it's that silly to consider Wal-Mart the most valuable company.

But its definitely not in any financial metrics. If you own walmart for a year, you'll make around 4 billion, while if you own Google, you'll make around 7. And Google is likely going to be growing faster than Walmart.

If I sell 100 lemonades per day and can't pay my rent, yet my neighbor sells 50 lemonades but manages the business in a way to pay his rent and a salary, how can my business possibly be more valuable? It's a silly example but I don't think it's far fetched. Similarly, Apple is worth far more than 20% of the phone market despite having a grasp on only 20% (give or take, I don't recall the exact number) market shares. There's a reason companies aren't valued based on revenue.

Revenue is a terrible indicator, EBITDA is a good indicator.

Interest rates are at a record low. Amd is at a pe ratio of like 100, the average pe ratio today is around 15 iirc. With a growth expectation increasing because of apples adoption and all, plus with record low interest rates, a 60x multiple is not insane.

60x might not be impossible, but it's absolutely insane, even if it's common.

Nvidia's own pe ratio is around 80 it looks like. Its not actually that insane. Overvalued? Maybe. But all this is saying is that basically, you think that your current required rate of return minus your expected growth rate for ARM is around 1.7%, and your required rate of return is going to be pretty low right now because interest rates are so low. You value future earnings more and you think it's going to grow a lot. You might be wrong, and for a company like AMD with a pe ratio above a hundred you might be betting in an awful lot of growth happening, but in this environment, these are not "insane" numbers.

P/E ratio is not the same as a purchase-valuation multiplier.

What you brought up above in this thread is how expensive the acquisition looks as a multiple of earnings. That multiplier is the price of the company vs the earnings for the company, which is literally just a simplified P/E ratio that ignores dilution etc. You may be thinking of revenue multiple based valuation instead?

Apple has a one time ARM architecture license so that’s not going to be recurring revenue for ARM.

This is more from a increasing adoption of arm industry wide perspective as people begin writing code on and optimizing code for ARM machines. Could trickle over into increased adoption by other companies and other sectors.

They pay a royalty for every chip they ship.

> the average pe ratio today is around 15 iirc

I'm not sure what population of companies you're taking your average from, but the S&P 500 p/e is a lot higher than that.

That was a mistype, thanks for catching that. I meant 25, but I haven't kept up with the last quarter so I have no idea what it looks like with all the recent insanity, so that might be pretty far off as well

ARM the companies growth rate has been tepid at best since SoftBank bought it. You need a high growth rate to justify a high multiple.

And interest rates can change quickly. It’s a value trap to overweight current interest rates in equity valuations.

> ARM the companies growth rate has been tepid at best since SoftBank bought it.

It's a "knock it out the ballpark" victory by Softbank's standards.

If you look at the products these chips are in and see the breakdown. Cost of IP license from ARM, price to make that chip and price that chip sold in that product, let alone the final product price. The margins are thinest in ARM's area and for each chip they sell, the others down the line do have larger margins. I don't have TMSC's production costs and what they charge at hand, but i'd hazard that what TMSC make per chip is possibly more than what ARM makes per chip.

Maybe why SOftbank want to raise those licence costs and that is with alternatives now about, not that easy an equation than just raising those costs as many for controllers that RISCV become more than fine for and some HD manufacturers already transitioning for a few cents extra savings currently, let alone if ARM license increased.

Sure ARM here there and everywhere but it got that way as much on the cheap costs of using that IP as much as the array of IP packaged up. So yip they make money, but it's if you breakdown how they make money, ARM are regular/reliable, hence less spikes in income either way.

Logicaly, for ARM to increase revenue, it would need to branch out into other markets. Nvidia honestly would be a good fit for that over shafting licensing costs, which may well see an increase, but for what softbank wants for returns - ARM would not wear out the level of increases they would want and Softbank know this - hence sell or IPO them best for Softbank and also ARM.

> I don't have TMSC's production costs and what they charge at hand, but i'd hazard that what TMSC make per chip is possibly more than what ARM makes per chip.

Most ARM chips made aren’t pushing 7nm ultra expensive processes - and you are probably still correct.

That’s good take on ARM’s margin per chip.

If ARM could raise licensing fees, it already would have.

Why do you think ARM is undervalued? While I agree, that considering the value of the ARM Arch brought to the mobile world, it may seem undervalued when you compare it to the insane valuation of some BS software companies, their business model of licensing IP doesn't allow them to make mega money. Apple and others have a perpetual licenses even.

Sure, if they want to, they could change the licensing model to bleed their customers dry and increase share price but that would just work temporary as everyone would then accelerate the movement to RISC-V.

ARM(the company, not the Arch) has peaked and will probably just stagnate for the foreseeable future.

I just find it hard to believe that Softbank would settle for $1B in profit for a highly successful business. They may have overpaid themself or ARM is losing them money, but why would Nvidia want to pay $32B for a money losing business?

Because Softbank itself is hemorrhaging money/losses and needs to start protecting itself.

Exactly. They have lost so much money - this will at least put some back in their coffers - how much did they lose on WeWork? $18B

They probably have no idea how to hype up ARM. It's like I bought out Apple Store in NY in cash but have no idea what to do with it other than to admire it

The multiples arm is trading at and With the new Apple lines I think they are doing a good job out of it .

SoftBank is run by an idiot that he paid 10x revenues for ARM when its growth was already slowing substantially.

Also keep in mind that Softbank has needed money to pay off their large debt load, which probably reduces the amount of leverage they have in negotiations.

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