ARM, the largest IPO in 2023, surged 24% when it went public! Will you be more motivated in the future?

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On September 14th, Eastern Time, SoftBank's chip company ARM was officially listed on the Nasdaq exchange, and became the largest IPO of the year with a valuation of US$54.5 billion. After the listing, there was a wave of high opening and high selling, and the opening price rose by 10 %, and finally closed up 24.69%, with a market value of US$65.2 billion.

The happiest people are undoubtedly SoftBank and Masayoshi Son, because SoftBank still holds about 90% of ARM's shares. This rise has increased the value of their shares by US$12 billion.

But apart from the short-term stock price, what else is interesting about this year’s largest IPO? Specifically, there are three main aspects:

First, many technology giants have participated in investment. What is their purpose?

ARM’s CFO Jason Child said that they sold $735 million worth of stocks to a number of strategic investors, including Apple, Google, Nvidia, Samsung, AMD, Intel, Cadence, Synopsis and TSMC, among others.

These companies are core enterprises in the chip field and have an important industrial status. However, the purpose of their investment is different from SoftBank. It is not to heat up the stock price and increase valuation, but as a long-term strategic investment. Why do you say that?

You know, more than 95% of smartphones and tablets in the world use ARM architecture, including Apple and Qualcomm chips. It can be said that ARM is already the dominant player in the field of chip architecture.

Before going public, Nvidia had intended to acquire ARM from SoftBank. If the acquisition was successful at that time, it would undoubtedly be a huge threat to other chip companies. Now that there is an opportunity to occupy a part of the equity, the giants will naturally get involved.

However, these giants only bought a total of 735 million U.S. dollars in stocks, and the amount allocated to each manufacturer is not large. Therefore, the greater significance is to occupy part of the voice to check and balance each other and prevent ARM from being monopolized by certain competitors.

Second, ARM is the largest IPO. It naturally has outstanding advantages, but it also has big flaws.

It can occupy an important position in the mobile chip market, relying on low power consumption and cost performance. In fact, ARM does not produce its own chip products, but licenses the chip architecture it designs to other semiconductor companies and charges architecture license fees.

The question is, why do semiconductor companies need chip architecture? You must know that chip design is a highly complex task, usually involving billions of transistors. If we use the analogy of architectural design, it is equivalent to designing billions of small rooms. Designing from scratch will consume a lot of time and manpower. .

The chip architecture is equivalent to the "rough house" of the chip, and the semiconductor company only needs to do "fine decoration".

The mainstream chip architectures on the market are X86 and ARM. X86 is a complex instruction set architecture that pursues performance but consumes a lot of power, while ARM is a streamlined instruction set architecture that has weaker performance but low power consumption. Such characteristics make it very suitable for mobile chips. , and thus welcomed by mobile chip and equipment manufacturers.

At the same time, the common practice in the telecommunications equipment market is to charge patent royalties based on the terminal price. However, ARM charges royalties based on the chip selling price, which is about 1% to 2%. According to statistics, the average price of Qualcomm mobile phone chips is about is US$40, while the average selling price of smartphones in 2022 will be US$335, which is a price difference of approximately 8 times.

This kind of licensing model and low fee mechanism have become a weapon for ARM to quickly occupy the market. You may think that ARM only needs to sell "rough houses" with peace of mind and collect rent. This seems to be a good business.

But the problem is that when they successfully occupy the market, the low fee mechanism actually becomes a disadvantage, because the revenue scale is small and the growth space is limited.

ARM’s revenue in fiscal year 2022 is US$2.703 billion, but their customer Qualcomm’s revenue is US$44.2 billion, and ARM’s revenue is less than one-tenth of others. What's more serious is that as chip demand shrinks, ARM's revenue in fiscal year 2023 dropped to US$2.679 billion.

Third, since we know that the existing business model has limited growth, can ARM reverse the situation?

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In fact, ARM has been facing a dilemma. It has tried to change the charging method to per-device charging, but this matter is not something that ARM can decide.

In fact, the mobile chip market is mainly dominated by giants such as Apple, Samsung, Qualcomm, etc. Compared with them, ARM is still smaller and its bargaining power when negotiating with giants is not strong.

At the same time, the giants are not without alternatives. In June this year, 13 companies including Samsung, Nvidia, Qualcomm, and MediaTek launched the software ecosystem plan "RISE" to jointly build a software ecosystem for RISC-V, which is known as the third largest CPU after X86 and ARM. Although the architecture is not yet mature, the purpose of so many giants participating is to lay out the technology in advance and reduce dependence on ARM.

Moreover, many customers have signed long-term contracts with ARM. For example, Apple’s contract has been extended to 2040. Even if ARM wants to change its cooperation methods, it will be many years later. Moreover, if ARM unilaterally changes the charging standards at will, the giants will have enough grace period to choose an alternative.

Now, the chip giants have begun to occupy ARM's shares again, and they have a greater say. Naturally, they will not easily allow ARM to make major changes.

This means that for the giants, ARM is more like a platform with public infrastructure, and what the public platform needs is the stability of products and systems rather than the hype of the stock price.

It is undeniable that ARM has unique value in the chip industry, which is enough for it to get a share of the pie. At the same time, it will exist in the capital market for a long time and will be held by many large companies for a long time. However, the dilemma it faces is difficult to change easily. Therefore, The room for upside may be very limited, but after the rush to go public, there is still a lot of room for the stock price to fall. Spread EX