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
- AI chip IP market outlook and risk associated with RISC-V adoption
- Revenue growth outlook in China and ex-China business
- Evolution of Arm’s relationship with key customers such as STMicroelectronics (NYSE: STM) and Apple (NASDAQ: AAPL)
- Assumptions behind Arm’s USD 60bn-70bn valuation and feasibility of proposed new business model
Questions
1.
There’s only one news story in town when it comes to Arm – the F-1 listing that came out on 21 August 2023. What are your initial impressions of the listing that you’ve seen?
2.
Could you elaborate on Arm’s growth? We acknowledged that growth was flat but declined in its Q1 FY23 quarterly reporting, I think, whereas revenue growth between 2020 and 2021 was around 30%. What has happened in the last two years to cause this change? Prior to the flat growth, the company was reporting more than 10% every year.
3.
What do you think is a sustainable YoY growth rate for Arm in the new environment we are in, especially given a potential economic downturn, RISC-V adoption and the headwinds you mentioned with AI being in the cloud vs in the device?
4.
You suggested that AI in the cloud vs in the device might mean Arm is less able to take advantage of that headwind. Could you elaborate on that?
5.
Why won’t Arm be able to maintain its business in cloud beyond five years? Why do you think five years is the growth period limit?
6.
When do you think Arm can achieve 30-40% market share in cloud? According to the company’s preliminary prospectus, market share is around 10.1% in data centre – sometimes used interchangeably with cloud. How quickly could the 10% rise to 30-40%, which you think is possible?
7.
Do you think it is possible for Arm’s CPU [central processing unit] to become an integral part of an AI boom?
8.
How should we think about the data centre end market as a growth source for Arm? Is it possible for the company to become as big a force in data centre as it has in consumer, especially in mobile and IoT devices, etc?
9.
There have been discussions about a potential change in Arm’s business model moving to a product-based model from a chip-based model. This would increase the royalty rate quite significantly if successful. There doesn’t seem to be a consensus on how successful this business model shift will be. How practical do you think it could be?
10.
What’s your outlook for Arm’s strong margin profile of about 90-95% gross profit margin and approximately 23-25% operating margins? Are those levels sustainable within the time periods and growth rates we’ve been discussing? Do you see these diluting at all?
11.
How do you think margins could evolve over the next 2-3 years, or even five years?
12.
I understand that STMicroelectronics is quite a big customer of Arm’s. Another specialist [see STMicroelectronics – 2023 Outlook & Competitive Positioning as Supply-demand Imbalances Ease – 18 April 2023] suggested that if Arm wanted to change its business model in the way we have discussed, it would accelerate RISC-V adoption and might only have a 30% chance of being successful. What is your response to that?
13.
Where might Arm be most resilient against RISC-V? Would it be in mobile and consumer?
14.
When would you expect RISC-V open-source architecture adoption to really start increasing in the longer term?
15.
Would it be a positive or a negative for Arm if Microsoft is interested in designing SoC [system on a chip]? Would it make the red-flag situation worse?
16.
You described Android supporting RISC-V as a yellow-flag situation for Arm. What does that mean in practice for the company’s revenue if Android is supporting RISC-V?
17.
Is there anything else besides RISC-V that you would highlight as a risk to Arm’s future business?
18.
China is certainly one of the areas in Arm’s prospectus that seems to have caught people’s attention – the company covers the risk of China in about 3,500 words, and clearly feels it is important to understand. How should we assess the China business and associated risk given the somewhat independent operations of Arm China and upheaval with the CEO?
19.
Arm’s prospectus describes one of the major risks as the financial results of Arm China, but also Arm China’s ability to make payments to Arm in a timely manner or at all, which seems quite uncertain. What exactly does that mean? What is the risk of Arm China not making payments to Arm?
20.
You described Arm’s USD 60bn-70bn valuation as very high. What do you think is the best way to think about the valuation, especially given the risk around China and potentially losing one-quarter of its revenue from China in 5-6 years, alongside the risk of RISC-V adoption happening within the next five years? Do you think it should be closer to the USD 40bn valuation when Nvidia was thinking about buying the company?
21.
Why do you suggest it will be impossible for Arm to maintain a valuation of USD 64bn after the IPO, if it is able to achieve that?
22.
Is there anything else about Arm and its IPO to mention that you’ve observed or think is important to highlight?
23.
How should Arm invest the capital it raises from an IPO?
24.
Is there anything else about Arm that you would highlight before we wrap things up?
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