SoftBank Group Corp.’s Arm Holdings Ltd., the UK-based chip designer that powers most of the world’s smartphones, has filed for an initial public offering (IPO) on the Nasdaq stock exchange, aiming to become the biggest tech debut of 2023. The company is seeking a valuation of $60 billion to $70 billion, which would make it one of the most valuable semiconductor companies in the world. However, the IPO also comes with significant challenges and uncertainties, as Arm faces increasing competition, regulatory scrutiny, and customer conflicts in the fast-changing chip industry.
Arm’s Business Model and Growth Prospects
Arm does not manufacture chips itself, but licenses its designs and architectures to other chipmakers, such as Apple Inc., Samsung Electronics Co., Qualcomm Inc., and Nvidia Corp. Arm collects royalties based on the number of chips sold by its customers, as well as fees for licensing its technology. Arm’s designs are known for their low power consumption and high performance, making them ideal for mobile devices, such as smartphones and tablets.
Arm has been a dominant player in the smartphone market, with its designs being used in 99% of all smartphones sold worldwide. However, the smartphone market has been slowing down in recent years, as consumers upgrade their devices less frequently and new features become less attractive. Arm’s revenue declined by 1% to $2.7 billion in the fiscal year that ended March 31, 2023, and by 2.5% in the quarter that ended June 30, 2023.
To boost its growth, Arm is betting on expanding into new markets, such as artificial intelligence (AI), cloud computing, internet of things (IoT), and autonomous vehicles. Arm believes that its designs can provide low power and high performance solutions for these emerging applications, which require massive amounts of data processing and analysis. Arm claims that its designs are already used in billions of devices that run AI and machine learning workloads, such as cameras, digital TVs, cars, and data centers. Arm also says that it is well-positioned to capture the opportunities in large language models, generative AI, and autonomous driving, which require specialized acceleration of algorithms.
Arm’s IPO filing states that the company “will be central” to the transition to AI computing, and that it expects its total addressable market to grow from $14 billion in 2020 to $74 billion in 2030. Arm also cites research reports that predict that AI chip revenues will grow from $8 billion in 2020 to $67 billion in 2025, and that AI edge device shipments will grow from 1.9 billion units in 2020 to 7.6 billion units in 2025.
Arm’s Challenges and Risks
However, Arm’s ambitious plans also face significant hurdles and risks, as the company competes with established and emerging rivals in the chip industry. Some of Arm’s challenges and risks include:
- Competition from other chip architectures: While Arm has been dominant in the smartphone market, it faces stiff competition from other chip architectures, such as x86 and RISC-V, in other markets. For example, x86 chips, made by Intel Corp. and Advanced Micro Devices Inc., are widely used in PCs and servers, which account for a large share of the cloud computing market. RISC-V chips are an open-source alternative to Arm’s designs, which offer lower licensing costs and more flexibility for customization. RISC-V chips are gaining traction among some of Arm’s customers and competitors, such as Alibaba Group Holding Ltd., Huawei Technologies Co., Nvidia Corp., and Samsung Electronics Co.
- Regulatory scrutiny and antitrust issues: Arm’s IPO comes after its proposed sale to Nvidia Corp., the world’s largest maker of graphics chips and a leader in AI computing, was blocked by global antitrust regulators earlier this year. The deal, which was announced in September 2020 for $40 billion, would have been the biggest chip acquisition ever. However, regulators in the US, UK, China, and Europe raised concerns that the deal would harm competition and innovation in the chip industry, as Nvidia could gain access to Arm’s technology and customers. The deal was officially terminated in February 2022.
- Customer conflicts and tensions: Arm’s IPO could also create conflicts and tensions with some of its customers, who may see Arm as a potential competitor or threat in their own markets. For example, Apple Inc., which is one of Arm’s largest customers and accounts for about 10% of its revenue, has been developing its own custom chips based on Arm’s designs for its iPhones, iPads, Macs, and other devices. Apple has also been investing heavily in AI chips for its Siri voice assistant, Face ID facial recognition system, and neural engine for machine learning tasks. Apple could reduce its reliance on Arm’s technology or demand lower royalties or fees from Arm in the future.
- Customer concentration and dependency: Arm’s revenue is highly dependent on a few large customers, who account for a significant share of its revenue and royalties. According to its IPO filing, Arm’s top five customers accounted for 54% of its revenue in the fiscal year that ended March 31, 2023, and 56% of its revenue in the quarter that ended June 30, 2023. Arm’s top customer, which is not named in the filing but is widely believed to be Apple Inc., accounted for 28% of its revenue in the fiscal year that ended March 31, 2023, and 29% of its revenue in the quarter that ended June 30, 2023. Arm’s revenue and profitability could be adversely affected if any of its major customers reduce their orders, switch to other chip architectures, or negotiate lower prices or terms with Arm.
Arm’s IPO Details and Expectations
Arm has not disclosed the number of shares it plans to sell or the price range for its IPO yet, but it is expected to seek a valuation of $60 billion to $70 billion, according to Reuters. Arm has also held talks with some of its biggest customers about backing the IPO, according to Bloomberg. Arm plans to start its roadshow in early September and price the IPO in the following week, according to Bloomberg.
Arm’s IPO would be a major windfall for SoftBank Group Corp., the Japanese conglomerate that bought Arm for $32 billion in 2016. SoftBank founder Masayoshi Son has touted Arm as an AI company that could have “exponential growth” and promised ChatGPT-like services would eventually be offered on Arm-designed machines. SoftBank also this week bought the 25% stake in Arm that it did not own directly but that had been held by the Saudi Vision Fund, which SoftBank manages. That purchase valued Arm at $64 billion, according to the Financial Times.
Arm’s IPO would also be a boost for the struggling IPO market, which has seen a slowdown in tech offerings this year amid market volatility and regulatory crackdowns. The listing is poised to be the largest in the US since electric-vehicle maker Rivian Automotive Inc.’s $13.7 billion offering in October 2021. It could also rank near or even just below the tech industry’s largest-ever IPOs: Alibaba Group Holding Ltd.’s $25 billion 2014 offering and 2012’s $16 billion debut by Meta Platforms Inc., then known as Facebook Inc.
