Who is ARM?
99% of the smartphone chips in the world are designed by one company: ARM. Coming to NASDAQ soon, ARM creates IP (intellectual property) designs that allow the software in a device to communicate with the hardware to process instructions and execute different functions. This is called the Instruction Set Architecture (ISA), think of it as the type of language that the digital components of the device use to speak to the physical components of the device. “Hey hardware, our user just pressed the picture button, take a selfie!”. ‑ Software
So how does the business work? Let’s say Apple is designing a chip for its newest iPhone, ARM will sell Apple its newest designs for an up‑front licensing fee, and Apple will use this design to build the chip. Then, when that iPhone goes to market, Apple will pay a percentage royalty fee to ARM for every chip that ARM helped design. The royalties model allowed the company to reach an impressive 40% operating margin before going private in 2016, and they are expected to maintain the margin in the high 30% in the years after the IPO. ARM replicates this business model for other end markets as well, in IoT, Industrial, Automotive, PCs, and Data Servers. ARM’s total addressable market in 2019 was around $86B, by 2029 it will stand at $192B (Bernstein 2023).
The ISA Industry
There are two main players you need to be aware of:
- Intel – Mainly sells x86, a type of ISA language that is CISC‑based (Complex Instruction Set Computer). CISC is like the computer version of Mandarin Chinese, it offers an extensive array of instructions, suitable for a wide variety of functions but demanding substantial energy. Because of its complexity, for many years it has been more suitable for larger devices such as PCs and Data Servers.
- ARM – ARM products are based on a type of ISA language that is RISC‑based (Reduced Instruction Set Computer). RISC is the computer version of English, a simpler language, prioritizing only essential interactions, achieving higher efficiency and lower energy consumption. RISC's streamlined approach requires fewer processors, ideally suiting smaller, simpler products like smartphones, smartwatches, and automotive applications.
For almost 15 years, Intel has controlled the PCs and Data Servers, while ARM has controlled the Smartphones and IoT devices. But the space is changing: ARM is starting to penetrate the markets that Intel’s x86 has held such a strong hold over. Why? The PC and Data Server companies that previously only used the CISC‑based architecture are scaling to incredible levels, and are manufacturing more chips than ever before, costing these companies more energy than they’ve ever paid for before. And after almost 20 years in the business, ARM’s technology is finally able to handle the larger workloads that these end products require while still saving on power consumption, heat dissipation, and packaging space because they're based on the RISC architecture.
For example, after holding only 1% of the PC market share in 2019, ARM held 13% in 2022 and is expected to reach 25% by 2027 (Bernstein 2023). Driven by partnerships with Apple’s M1 Processor and a new line of Arm‑on‑Windows laptops that are competing with Intel’s version.
The same is happening in the Data Center space, ARM’s new Neoverse product line with basic infrastructure and higher compute offerings has led to partnerships with Broadcom, Marvell, and Qualcomm. The design has helped Amazon’s AWS build its Graviton3 and NVDA create its Grace CPU. ARM has carved out around 3% of market share since having none in 2019 but is expected to rapidly reach 20% share in 2026 (Bernstein 2023).
ARM faces new competition ...
Introduced in 2011, RISC‑V is an open‑source platform developed by various academic institutions, offering a free and simplified version of the RISC architecture, akin to Arm's offering. Unlike Arm, which entails substantial upfront licensing costs and design complexity, RISC‑V provides an easy‑to‑use and economically accessible alternative. Startups, small businesses, and even corporations are adopting this cost‑effective platform to craft their designs, circumventing the expense and intricacy associated with Arm's more sophisticated designs.
The economically appealing RISC‑V platform excels in ultra‑low power devices, aided by software firms like Cadence and Synopsys assisting users with their designs. Some "specialist" companies are advancing intricate designs on the platform, and selling them back to smaller users, intensifying competition with ARM. Investors are concerned that the RISC‑V community might create potent proprietary designs, posing a potential challenge to ARM's IoT dominance in industrial and embedded applications.
In 2016, Softbank, a Japanese investment firm, acquired ARM for $32B and took it private after 16 years on the public markets. 3 years later in 2020, the investors in the Vision fund looked to cash in on their deal through a potential acquisition by leading chip designer Nvidia. Naturally, the deal raised tons of alarm flags from regulatory committees in the USA, UK, and EU, and the deal fell through in 2022. Now, SoftBank is bringing back ARM to the IPO market, to finally cash in some returns, right? Here’s the caveat, Softbank plans to keep 90% of the company, only releasing 10% of the company to equity investors Wall Street Journal 2023. And there have been a number of reports indicating that top tech companies such as Intel, Nvidia, Alphabet, Apple, and Microsoft are interested in anchor investor roles, with minority stakes valued in the hundreds of millions of dollars.
According to a couple analysts, ARM is estimated to be valued at around $40B. With only 10% of free float coming to market ($4B) minus the hundreds of millions bought up by anchor investors, there is a chance only $2.5B‑$3.3B of ARM will be open to public equity investors. Suddenly the biggest IPO of the year doesn’t look so big after all.
Achevé de rédiger le 1er septembre 2023