With the world's largest IPO of $65 billion, Arm is ready to "harvest" the global semiconductor giant

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With the world's largest IPO of $65 billion, Arm is ready to "harvest" the global semiconductor giant

Li Yuan2023/09/16

summary

The world's chips are inseparable from Arm, and it has not really begun to "make money".

Author | Li Yuan

Edit | Jingyu

On September 14, US time, the world's largest IPO of the year was held as scheduled.

SoftBank Holdings' chip design company Arm officially landed on the NASDAQ at $51 per share, with a latest valuation of about $54.5 billion.

On the first day of listing, Arm's share price soared 25% to $63.59, and the company's valuation rose to more than $65 billion (about 472 billion yuan) from $54.5 billion previously.

However, $65 billion does not actually represent the true value of Arm. As the world's most important chip company, more than 99% of the world's smartphone chips are designed based on the Arm architecture, and its design is widely used in Apple, Qualcomm and Nvidia, these well-known giant companies.

Nvidia founder and CEO Huang Jenxun once said that without Arm CPU and IP authorization, NVIDIA would not be able to create super AI chips such as H100 that AI companies are competing for.

In fact, Arm's licensing model is almost equivalent to doing charity in the semiconductor field, and if it changes its profit model to a "tax-pumping" model similar to Qualcomm, the company's valuation will skyrocket. The bet of former Japan's richest man, Masayoshi Son, won a late reward.

01

Son's biggest bet

Arm's mobile supremacy has a long history.

As early as 2007, before the real smartphone wave began, the market share of Arm architecture chips in mobile phones had reached 98%, and by 2008, the world had sold tens of billions of chips equipped with Arm architecture.

However, today's Arm has been marked by the strong SoftBank Group founder and president Masayoshi Son. During the roadshow, Jensen Huang mentioned that "Arm's business field has expanded from client-side computing to supercomputing, cloud, artificial intelligence and robotics."

From a certain point of view, Son's achievements and unfulfilled dreams on ARM can be said to be a technical gamble with the right general direction but some deviations in the implementation path, and it is also a projection of the development of artificial intelligence technology from 2016 to 2023.

In 2006, Son met and kept in touch with one of Arm's first employees, Simon Segers.

In 2016, Simon Segers came to Son's mansion in California to have dinner with him. "We talked about AI and all the technologies that are future-focused and how we can use Arm's technology to connect anything — tables, chairs, refrigerators, cars, doors, keys, etc." Segers said.

At the same time, Segers also shared with Son the dilemma that Arm was in at the time: in 2016, the smartphone market began to saturate, profit imagination space became smaller, and Arm had to significantly reduce profit margins in order to make long-term investments in areas such as artificial intelligence, sensors, 5G and autonomous vehicles. As a listed company, such a prospect is not what investors want to see.

A few days later, Son met with Stuart Chambers, ARM's chairman at the time, to discuss the acquisition. Within a week, SoftBank had agreed with Arm on price. The entire acquisition process was completed in just ten weeks.

It was Son's most glorious era — investing in Alibaba, Yahoo, buying Vodafone's Japanese business, and Son was scheduled to retire at age 60 and even found a successor.

However, in 2016, instead of retiring as originally planned, Son invested $32 billion and bought Arm for 43% more than its market capitalization.

The following year, Son formed the Vision Fund, which raised $100 billion directly from a single fund at a time when the total annual investment in the U.S. venture capital industry was just over $70 billion. In the following years, with its bold forecasting and overinvested investment style, it frequently made headlines in the venture capital circle, single-handedly changing the global venture capital landscape.

In 2016, Son Masayoshi at a press conference announcing the company's financial position Image source: Visual China

In Arm, Son sees the real potential in the semiconductor field - a singularity of artificial intelligence, more precisely, the direction he sees is the explosion of intelligent Internet of Things devices like the "Cambrian explosion", which has greatly increased the demand for Arm chips.

The people of the Arm team soon saw Son's "madness".

A month after SoftBank acquired Arm, Arm's executive team traveled to California to report to Son on Arm's revenue plans and direction for the following year. Rene Haas, the current CEO of Arm, recalled the scene: "He wasn't interested in our revenue, he was just playing with his iPad. But when they started discussing the company's vision, Son got excited. Share your 300-year vision with us and say there will be a trillion IoT devices by 2035. I was thinking, is this deliberately creating a dramatic effect?"

In fact, Son has mentioned the 300-year vision and the explosion of IoT devices on several occasions. At the 2017 Mobile World Congress, Son mentioned that in the next 30 years, the number of superintelligent robots will surpass humans, more than 1 trillion items will be connected to the Internet, and artificial intelligence will be smarter than the human brain. This is the logic behind Son's big scientific and technological gamble.

Under Son's leadership, Arm has done a lot of hiring and has invested heavily in research and development. According to the prospectus, in fiscal 2021, fiscal 2022 and fiscal 2023, Arm's research and development expenses accounted for 40%, 37% and 42% of the annual revenue in the same period, respectively, while several other familiar chip manufacturers, such as NVIDIA, AMD, and Intel, basically accounted for more than 20% of the annual revenue in the same period.

Such research and development has also led to a decline in Arm's profits. ARM's profit margin was about 34% before the SoftBank trade, and it is currently about 24%.

Son has always believed in artificial intelligence and the singularity theory, but he is afraid that it is difficult to predict that the development of artificial intelligence in recent years has not been as good as he imagined, which will have a great benefit to the Internet of Things and edge computing, whether it is ordinary Internet of Things applications or chip-intensive self-driving cars appear slower than expected.

However, Arm is still an important and non-negligible company, whether it is still the mainstream smart mobile device market, or the explosive AI computing power market, Arm's development and revenue potential, can not be underestimated.

02

The promise and challenges of Arm

Back to the present, although Arm's growth is not as "crazy" as NVIDIA's, Arm is still a profitable company with a solid moat.

As of December 31, 2022, the share of Arm architecture CPUs in the global smartphone market exceeded 99%, and the cumulative shipment reached 250 billion.

According to Counterpoint's forecast for 2023, personal computers based on the Arm architecture will also become increasingly popular, mainly due to the market growth of Apple's Mac series based on the Arm chip architecture. The market share of personal PCs based on the Arm architecture will almost double from 14% today to 25% by 2027.

Given its technical difficulty, the Arm architecture has a very solid moat in the chip field, and such a moat has also brought huge profits. In fiscal 2021, fiscal 2022 and fiscal 2023, Arm's gross profit margin was 93%, 95% and 96%, respectively. There are two main ways to monetize Arm:

• One is the license fee that chip manufacturers need to pay before using the architecture, and charge different fees according to the new and old architecture that customers need to use, which accounts for about 40% of Arm's total revenue;
• One is royalties, which take a cut of 1%-2% of the price of using Arm architecture chips, accounting for about 60% of total revenue. Other income is roughly negligible.

However, a solid moat does not mean that there are no challenges.

Like Arm, RISC-V (pronounced risk five) with a reduced instruction set is on the rise. According to the RISC-V Foundation, the RISC-V architecture, born in 2010, has produced 10 billion chips by 2022, half of which come from China.

Compared to Arm, the biggest benefit of RISC-V is that it is open source and free. During NVIDIA's acquisition of Arm, RISC-V received a wave of attention. Arm has always been neutral, with architectural standards open to all enterprises, and concerns about Arm becoming no longer neutral after the acquisition, necessitated an alternative.

Due to the consideration of the international situation, Chinese enterprises are also very concerned about RISC-V. It can be seen that Ali Pingtou, Huawei, the Chinese Academy of Sciences, etc. have all launched the relevant layout of RISC-V. Out of the need for independent and controllable, Ni Guangnan, an academician of the Chinese Academy of Engineering, has publicly stated: "China's chip industry and the entire chip ecosystem will increasingly focus on the RISC-V architecture." About a quarter of Arm's revenue comes from China, which is second only to the United States.

In the first half of 2023, 13 companies such as Samsung, Intel, and Qualcomm also jointly launched the RISE Alliance to build RISC-V's software ecosystem in an attempt to reduce their dependence on ARM.

In more advanced fields, RISC-V is still some distance from competing with Arm. "The problem with RISC-V is that it's not yet mature. It doesn't have the same level of support for more advanced designs," Counterpoint Research's research director told CNBC.

But on IoT chips that are less demanding and require a large number of deployments, the free, open-source, modular RISC-V seems to have a chance to compete with Arm.

Son at the 2016 SoftBank World Congress | Image source: Visual China

In addition to the emergence of new architectures, changes in large customers themselves may also affect Arm's profitability.

In this Arm listing, 10 companies including Apple, Google, Nvidia, Samsung, Intel and TSMC have agreed to become investors in this offering. Arm's long-term neutrality is also a defensive strategy for tech companies to prevent each other from acquiring Arm.

But it's worth noting that Qualcomm, which contributes 11% of Arm's revenue, didn't invest. Qualcomm previously acquired a startup called Nuvia, hoping to use Nuvia's technology to design its own chips, and the fee paid to Arm will be greatly reduced. At present, the two companies are still going to court because of this matter.

In addition, the smartphone market, where Arm dominates, has stagnated. Arm's revenue has grown 65% since 2016, slightly higher than the chip industry's general value, but far behind the industry leaders. As mentioned earlier, profit margins have fallen due to sufficient investment in R&D.

According to the New York Times, at first, investors expressed concern about Arm's valuation. SoftBank has a clear message to skeptical analysts and investors that after raising royalties by about 40 percent, Arm's revenue will skyrocket in the coming years.

Regarding the price increase of Arm companies, it has been reported that Arm will change its business model and charge terminal manufacturers such as mobile phone manufacturers, and there are also reports that Arm is shifting to a broader licensing model, not charging license fees according to specific chips, but charging a wider range of license fees for accessing Arm. However, at present, there is not much definitive information to analyze this further.

In addition to the chip business of smart terminals, Arm is also expanding its business direction such as servers. Through investment, Arm has achieved more success in areas such as servers and automotive components. In cloud computing, its market share is about 10%, while in the automotive sector, it has a 40% market share.

CEO Rene Haas, who took office in 2022, said: "Although the Internet of Things is still a very important area for us, we are very focused on the computer field (servers and PC chips)."

In addition, for generative AI, Arm has also optimized the CPU in the latest solution. However, at present, it cannot be said that you have obtained the ticket to generative AI.

In 2022, Son said that he would no longer participate in the day-to-day operations of SoftBank and focus on Arm. "Right now, I delve into ARM's technology, business model and business strategy from morning to night, which is my source of energy, my source of joy, my source of excitement." Son said.

*Head image source: Visual China This article is an original article of Geek Park, please contact Geek Jun WeChat geekparkGO for reprinting

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