Introduction
Company’s history
ARM (ticker: ARM) is a semiconductor company headquartered in the UK. It was founded in 1990. The three main founding shareholders at that time were Acorn Computers, Apple (ticker: AAPL) and VLSI Technology.
Acquired by SoftBank
In 2016, SoftBank (ticker: SFBK) acquired Arm for US$32 billion and privatized the company.
Nvidia’s acquisition failed
Nvidia (ticker: NVDA) tried to acquire Arm for US$40 billion in September 2020, but gave up the acquisition in February 2022 due to regulatory scrutiny and setbacks. Since the failure of the Nvidia acquisition, SoftBank has suffered losses; in the first quarter of 2023, SoftBank lost US$3.3 billion.
Nvidia’s acquisition of ARM is a top priority in the semiconductor industry. For related analysis and discussion, please see my previous post “How does nVidia make money, Nvidia is changing the gaming rules“.
Stock listing
IPO
In 1998, Arm was listed in London and became a component of the FTSE 100 Index; it also issued American depositary receipts and was listed on the Nasdaq.
Relist
In order to get rid of Arm, a money-losing product, SoftBank allowed Arm to be listed again on September 14, 2023, seven years after it was acquired by Japanese conglomerate SoftBank. The offering price was $51, and the company’s stock price has been hovering around the IPO price amid concerns about declining revenue, shrinking operating margins and overvaluation.
Arm’s operations
Business model
ARM does not produce chips for sale on the market. Instead, it licenses the chip architecture it designs to other chip manufacturers instead of manufacturing chips. This is how the company earns its main revenue.
Arm provides two business models, licensing and royalty:
- The licensing model pays according to the number of IP authorizations, which is a one-time product authorization fee.
- The royalty model pays based on the number of wafers manufactured, and the fee is linked to sales volume.
Royalty income has been Arm’s main source of income over the years.
Key operating indicators
According to the contents of Arm’s listing prospectus:
- As of the first quarter of 2023, Arm has 260 customers worldwide.
- Since its establishment, the company has shipped 250 billion chips based on Arm’s technology architecture.
- It has 15 million developers worldwide.
- 70% of the world’s population uses chips based on Arm’s technology architecture.
Without Apple, there would be no Arm
Arm’s main customers
Almost all of Apple’s device products use ARM’s architecture, including the A-series chips for mobile devices and the M-series chips for Macs and high-end iPads. This makes Apple one of Arm’s largest customers.
In September 2023, Apple and Arm signed a new agreement to extend the current cooperation relationship between the two parties “after 2040.”
According to a report by the US media “The Information” on January 29, 2023, Arm’s revenue from Apple accounts for less than 5%, which is about half of Arm’s largest customers Qualcomm and MediaTek. Apple pays ARM an annual patent fee of less than $0.30 per device for the rights to use ARM’s chips in hundreds of millions of iPhones, iPads, Macs and Apple watches. This is the lowest patent royalty among Arm’s smartphone chip customers.
At one point, Masayoshi Son called Apple CEO Cook and told him that ARM would increase charges for all of its major smartphone and chip customers. But Cook’s team assured him that ARM couldn’t raise the fee because the company’s contract at the time was valid until 2028, prompting Son to back down. Since then, Apple and ARM have conducted multiple rounds of negotiations, but the financial terms of the Apple deal have remained basically unchanged.
Apple founded Arm
Without Apple, Arm might not exist. As early as 1990, Acorn Computers, VLSI Technology and Apple formed a joint venture to form ARM.
Original mission
The goal at the time was to challenge Intel’s x86 architecture with energy-efficient chip technology that was easy to program and expand. By prioritizing battery life and technical flexibility over computing power; this makes ARM-based chips more attractive to many mobile chip manufacturers than x86 chips. Currently, more than 95% of the world’s smartphones use Arm-based chips
This is why Apple used ARM-based chips in its first mobile computer, the Newton, in 1993.
Participated in IPO fundraising again
Apple has also become one of the 10 “cornerstone investors” along with AMD (ticker: AMD), Alphabet’s (ticker: GOOGL and GOOG) Google and Samsung, investing a total of US$735 million in its IPO. Tony Fadell, former senior vice president of Apple’s iPod division, is also a member of ARM’s board of directors.
The most successful platform in RISC
The origin of Arm
Arm was originally the abbreviation of “Acorn RISC Machine” because its first product was a reduced instruction set computer (RISC) chip for Acorn computers. But when Acorn was founded in 1990, it changed its abbreviation to “Advanced RISC Machine” to focus on a broader market beyond Acorn.
Make money using intellectual property rights
Over the next three decades, ARM’s RISC designs continued to evolve to meet the needs of different chip manufacturers. Arm has also made its instruction set architecture (ISA) a proprietary, specially customized platform, which allows it to collect royalties and licensing fees from all Arm-based chip manufacturers.
Intel’s ARM products
Don’t believe the iPhone will succeed
Intel investors remember that it lost the mobile chip market to ARM because Intel was arrogant and stubborn in believing that its x86-based Atom chips could fully support smartphones, tablets, and the Internet of Things. device. Intel also refused to produce an Arm-based CPU for Apple’s first iPhone because Intel did not believe the iPhone would be successful.
Give up Xscale
Intel also sold its Xscale division based on the Arm architecture to Marvell Electronics (ticker: MRVL) in 2006. This seemed like a good idea at the time because it freed up more resources for the development of Intel’s own Atom chips, but it turned out to be this. It was one of the biggest strategic mistakes in Intel’s history, and it caused Intel to widely miss the massive shift from PCs to mobile devices.
If Intel had expanded its Xscale unit and used its dominance in the PC and server markets to sell it, the current semiconductor market would be very different.
Main competitors
x86
The x86 chip platform represented by Intel (ticker: INTC) and AMD is Arm’s number one opponent. Different from Arm’s RISC architecture, x86 is one of the few CISC chip architectures that is still widely used. Especially in the field of personal computers and servers, x86 is still the dominant force.
Although manufacturers have continued to promote the use of Arm platform technology in the past few decades and launched a large number of personal computers, except for Apple, such personal computers using Arm platform technology have never aroused consumer interest.
It’s not an exaggeration to say that ARM’s success in mobile devices was caused by Intel’s arrogance. However, Arm still lags far behind the x86 chip platform in areas other than mobile devices. This should remain impossible to change in the foreseeable future.
RISC-V
However, ARM’s licensing fees have prompted some chipmakers to revisit open source RISC architectures to develop new energy-efficient designs. The largest RISC-based project is RISC-V, a platform developed at the University of California, Berkeley over the past decade.
In recent years, several technology giants including Alphabet, Nvidia and Western Digital (ticker: WDC) have begun developing RISC-V chips. Arm acknowledged in its IPO filing that many of its customers “are also major supporters of the RISC-V architecture and related technologies,” and Arm warned that they “may choose to use this free open source architecture instead of our products.” .”
New open source chip design platforms may undermine Arm’s long-term growth, and RISC-V is the most critical force. Moreover, RISC-V, a new open source chip design platform, has become Arm’s main competitor in many fields. Especially in China, the United States has used various reasons to block China’s semiconductor development, forcing China to become the most successful market for RISC-V development. This is a top priority that makes Arm uneasy.
Capital market performance
What’s Arm’s tracking record?
Senior U.S. stock investors all know that Arm was listed on the U.S. stock market. Before being acquired by Software Bank and delisted (Armou already had a considerable market share at that time), Arm’s previous performance in the US stock market was actually not very good, unless you are a professional or a professional semiconductor investor, generally Investors don’t even know this stock exists.
Keep in mind! Generally speaking, listed stocks with excellent performance will not be delisted unless there are very special reasons, and they will not be willing to be acquired.
Share price looks cheap, but
Arm’s market share is increasing, but the stock price is expensive. There is no doubt that Arm’s adoption rate is increasing compared to x86; but whether its stock price is justified is another matter. The stock currently trades at more than 55 times 2024 earnings expectations, or forward price-to-earnings ratio. This number is far higher than Nvidia, a popular semiconductor company in the US stock market today – in fact, it is almost twice the forward price-to-earnings ratio of Nvidia!
Although Nvidia uses ARM in its Grace CPU chips, ARM is not part of Nvidia’s core GPU products, which account for the vast majority of Nvidia’s eye-popping revenue figures. So while Arm is definitely an interesting asset-light growth company, it’s still a very expensive stock. When the valuation multiples of other top semiconductor companies such as Nvidia are much lower, it further shows how unreasonable its valuation is.
Although Nvidia uses ARM in its Grace CPU chips, ARM is not part of Nvidia’s core GPU products, which account for the vast majority of Nvidia’s eye-popping revenue figures. So while Arm is definitely an interesting asset-light growth company, it’s still a very expensive stock. When other top semiconductor companies like Nvidia trade at much lower valuation multiples
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