Few IPO-ready companies command 99% of the world’s most lucrative and hottest markets for all kinds of consumer goods.
For SoftBank-owned chip designer ARM, however, its overwhelming dominance of the smartphone processor market is both its most important asset and its biggest challenge in achieving a $60 billion valuation in its IPO next month.
In its IPO prospectus released this week, ARM warned investors that its large existing presence in the mobile and consumer electronics markets could limit future growth opportunities. Although ARM also has hopes of entering other markets such as automotive chips and cloud computing processors, analysts believe that in these markets, ARM will never achieve the near monopoly position it has in the smartphone market.
ARM also failed to break into the hottest area of the chip market this year: processor chips used to power various AI models, such as OpenAI’s GPT-4 model. Nvidia is the dominant player in this space.
Geoff Blaber, chief executive of technology industry research firm CCS Insight, said: “It’s hard to see that ARM will achieve significant growth in smartphones beyond current levels. There is no product that is more important than the iPhone, so ARM has become somewhat Victims of their own success, like Apple.”
Apple woes
For 30 years, the fortunes of ARM and Apple have been intertwined. Cambridge, England-based ARM was founded in 1990 as a joint venture between Apple and British PC maker Acorn Computers and Silicon Valley chipmaker VLSI.
ARM pioneered a new chip architecture that puts more emphasis on processing speed and simplicity of design than pure processing power. The company’s low-power chips are proving to be ideal processor choices for battery-powered handsets. ARM first emerged in the Nokia era, and from 2007 onwards, the development of the iPhone brought even greater growth to the company.
Although Apple funded the creation of ARM, the relationship between ARM and Apple is now complicated. While Apple is one of the most successful manufacturers of phones based on ARM chips, Apple’s name appears only a few times in ARM’s IPO filings, and the iPhone is mentioned only once.
ARM offers several technology licensing models to customers. In the most comprehensive licensing model, customers have unlimited access to their entire IP portfolio under ARM’s “Full Access Agreement”.
Another model is an architecture license with a smaller scope of authorization, which provides customers with the basic components needed to develop highly customized chips. But in this model, ARM’s income is usually not high. Apple holds a long-standing license to the ARM architecture and has spent billions of dollars developing breakthrough ARM-based processors for iPhones and Mac computers.
“What surprised ARM was that they gave up some good deals,” said Dylan Patel, principal analyst at consultancy SemiAnalysis.
ARM, for its part, says it can grow by selling more technology into each smartphone. Jay Goldberg, founder of chip consulting firm D2D Consulting, said in a research note on Tuesday that ARM only gets a small return on the value the company creates. Customers bought 30 billion chips powered by ARM processors last fiscal year, and ARM charges a royalty rate of 2.7% , or $0.11 per chip.
Patel argues that the focus on working with Apple and a handful of big smartphone manufacturers limits ARM’s pricing power, even though phone makers have few alternatives to ARM’s technology.
These customers are unlikely to be lost. ARM estimates that 46% of its royalty revenue last fiscal year came from products released between 1990 and 2012, reflecting the durability of the company’s business model. However, that may not be enough for investors to value ARM at more than $60 billion. Last year, ARM’s revenue fell 1% to $2.7 billion.
“They have to open up new markets,” said Malcolm Penn, chief executive of chip consultancy Future Horizons. “They’re in a different position than they were in the smartphone market. It’s not as easy as it was then because there wasn’t a single major end customer driving the market. “
The future beyond the smartphone
Before SoftBank acquired ARM in 2016, ARM was a company listed in London and New York. SoftBank CEO Masayoshi Son has declared that SoftBank will push ARM to the core of the Internet of Things.
Seven years later, however, analysts point out that ARM has failed to achieve the expected new growth. ARM’s prospectus shows that the company has a 65% share of the industrial Internet of Things and embedded semiconductor market, but the value of products in this area is low, so it is not as profitable as Son envisioned.
Masayoshi Son’s recent obsession with AI, and ARM has also made some progress in this regard. It has partnered with self-driving companies such as GM’s Cruise. Nvidia also uses ARM’s CPUs in its Grace Hopper “superchip” to power AI models in data centers.
When it comes to AI, however, ARM’s technology isn’t at the heart of the devices involved. AI needs more powerful chips, like Nvidia’s H100, and ARM’s technology is more of an enabler.
Still, Patel said there will be a complete transformation in the data center around AI computing, and ARM will be a beneficiary of that transformation. Cloud computing giants Amazon, Google and Microsoft are all developing processors based on ARM technology for data centers.
ARM estimates that the company now has a 10% share of the $18 billion cloud processor market, up from 7% in 2020, and expects the industry to experience double-digit growth in the coming years.
Another key area is the automotive industry. Currently, automakers are increasing the computing power of vehicles, whether it is engine management or assisted driving technology. ARM said it commands a 41% share of the automotive market, and related royalty revenue rose 36% last year.
ARM estimates that of the total potential market of $200 billion, or “all chips that can contain a processor,” the company has captured the potential of nearly half. After conquering the smartphone market, however, ARM may find the second $100 billion market to be tougher.
