SoftBank’s Arm is seeking the largest Nasdaq IPO in almost two years, targeting a valuation of $60-70bn despite flat revenue and declining net profit.
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Specialist
Former Director at Arm
Agenda
- Arm’s IPO prospects and post-IPO growth opportunities
- In-house chip strategy and potential rationale
- Response of customers to new business model and in-house chip development
- Risk of RISC-V adoption and competitive dynamics across Arm, Intel (NASDAQ: INTC), Imagination Technologies, Codasip, etc
Questions
1.
In terms of Arm’s upcoming IPO, a lot of sources have been talking about a valuation of USD 30bn-70bn. How should we think about where a valuation might fall within this quite big range? When Nvidia’s acquisition of Arm – which fell through in February 2022 – was announced in September 2020, it was suggested to be around USD 40bn. What are your thoughts on where we are today?
2.
You outlined some reasons for which it’s difficult to come up with a valuation of Arm, but it did come up with the valuation of around USD 40bn a couple of years ago. Has anything happened since that time that makes you think the valuation could be higher or lower than that USD 40bn that was suggested when the Nvidia deal was on the table?
3.
Does the ownership of Arm being neutral, ie, the Nvidia deal not happening and the company IPOing, suggest that the valuation could be above USD 40bn this time around?
4.
Press reports have very crudely put an arrow in between USD 30bn and USD 70bn and said USD 50bn for Arm, and your personal opinion is that the valuation could be above USD 40bn, but you don’t know where USD 70bn came from. Is USD 50bn realistic as a valuation?
5.
A specialist in a previous Forum Interview [see Arm – IPO Prospects, Product & Investment Strategy – 23 March 2023] suggested that if Arm couldn’t start charging royalties on the basis of a device’s value instead of the chip’s value, which is the new business model that it’s allegedly trying to implement, then the valuation might actually be less than the USD 32.4bn that SoftBank paid for Arm. In order for the valuation of USD 40bn-plus to be achieved, does Arm’s new business model need to work?
6.
SoftBank hasn’t posted Arm’s FY22 revenue yet, but based on previous years where growth has been 20-30% and on the quarterly reporting throughout 2022, would it be fair to assume that the company’s revenue could be around USD 3bn for FY22?
7.
In terms of the growth that Arm might experience, would you expect that to be more in line with the growth rate of the overall semiconductor industry? Stats from Statista suggest that the industry grew by 4.4% in 2022. There’s another figure, 11%, so there are lots of different figures flying around. Would you expect the company’s growth to be more in line with the industry as a whole rather than outperforming the industry?
8.
Are the 20-30% growth rates that we’ve seen for Arm in the past sustainable or unsustainable over the next 12-24 months and beyond? Are the growth rates that we’ve seen since SoftBank took over Arm in 2016 sustainable for the next seven or so years?
9.
A specialist in the aforementioned Forum Interview [see STMicroelectronics – 2023 Outlook & Competitive Positioning as Supply-demand Imbalances Ease – 18 April 2023] who worked at STMicro, which is a customer of Arm, managed the relationship between the companies. He mentioned that if Arm wanted to change its business model in the way that it was suggesting, charging royalties on the basis of a device’s value rather than a chip’s value, that it might lead customers such as STMicro to stay with Arm until they’re able to develop a solution that implemented RISC-V [reduced instruction set computing-5], which could take 2-3 years, and then they would just simply move away from Arm architecture altogether. He said it could lead to a 2-3-year bounce in profits for Arm followed by a stagnation because customers would just leave. How much of a risk do you think that is?
10.
You mentioned it’s relatively easy for STMicro to switch because of the under-market IoT-managed devices and chips that it’s developing. Mobile’s a bit harder but it’s still possible as we’ve seen with Google and Android, and it’s not possible in data centre yet because the maturity in RISC-V isn’t quite there. I get the sense that Arm could be being used by customers as a holding pattern until RISC-V adoption takes off. Once RISC-V adoption takes off in all end markets, what does the future look like for the company?
11.
For how long do you think Arm will be able to be resilient in mobile if it implements the new business model?
12.
You mentioned Arm suing Qualcomm. If Arm’s lawsuit is successful, will that make Qualcomm switch to RISC-V even quicker?
13.
What is the risk-benefit analysis that Arm will have done when it comes to pursuing the lawsuit against Qualcomm? What’s the benefit if it wins, Qualcomm has to pay it but then is likely to develop something of its own with RISC-V and then leaves Arm? How could it not have seen that as a possibility?
14.
Could you quantify the likelihood or viability in percentage terms of RISC-V switches across Arm’s end markets in five years, specifically mobile business, the biggest one?
15.
Would it be possible for Arm to replicate its data centre business model – which already charges for OEMs in mobile on the assumption that RISC-V isn’t going to happen for another five years if that – but then keep its business model for IoT and embedded devices, which are easier to substitute for RISC-V? Would it be possible to have those different business models for different end markets and different clients? How would clients respond to that sort of thing?
16.
The specialist in the aforementioned Forum Interview on Arm seemed to think Arm’s new business model might have around a 30% chance of being successful, bringing together all the elements of what we’ve been discussing. Would you say that was an optimistic or a pessimistic prediction, maybe more pessimistic? What would your prediction be for the likelihood of it being successful if not 30%?
17.
There’s the suggestion that Arm is developing its own chip, and the company has hired a former Qualcomm exec, Kevork Kechichian, presumably to lead its in-house chip development. I think he worked on the Snapdragon team at Qualcomm. What should we make of these developments? What’s the rationale behind Arm developing its own chip?
18.
You said Arm had made a mistake with its lawsuit against Qualcomm. Will these announcements of Arm developing its own chip make that situation worse?
19.
Would it seem plausible that Arm is just developing a chip to flex essentially, and it won’t expect an ROI and start selling them at some point in the future? Media reports are suggesting that the company is flexing, but is that realistic?
20.
Alphawave has a chiplet strategy. Should we be viewing Arm’s new strategy or the opportunity behind the company developing its own chips and chiplets in a similar way to how Alphawave has been developing its own chiplet strategy? Would that be a good comparison?
21.
How long do you think it would take for Arm to get to a position where a chip or chiplet strategy was delivering revenue recognition?
22.
Looking at the capital that Arm hopes to raise from its IPO, I think it’s about USD 8bn. What areas should the company be looking at to invest that money? Would it be in R&D to push forwards the chip and chiplet strategy, which could keep it growing at 20-30%? Would it be in other areas such as developing its existing technology in a way that it’s better able to compete with RISC-V when that becomes more of a threat?
23.
Is there anything that could delay Arm’s IPO beyond 2023?
24.
What do you identify as risks to Arm in the future? Recent news suggests Arm only made USD 2.83bn in 2022. Is that a problem? SoftBank has apparently posted a record USD 32bn loss for Vision Fund, which is a tech investment arm. Is that a sign of tricky times ahead?
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