OUTSIDE THE BOX
Opinion: PCs and cars are the future for this giant but little-known chip-designer
Growth opportunities for Arm Holdings look strong despite stiff headwinds
One of the world’s most important technology companies is also one of the least discussed. Arm Holdings
ARM is a U.K.-based company founded in 1990 that has been the silent leader in the expansion of computing outside the world of servers and PCs. If you have a smartphone, a connected appliance, a smart TV, or digital home assistant, your personal technology has Arm at its core.
Arm has an interesting business history. It was purchased by the Japanese conglomerate SoftBank Group
JP:9984 in 2016, had an acquisition attempt in 2020 from Nvidia
NVDA that failed regulatory hurdles, and finally went back to being a publicly traded company on Nasdaq last Septmber. Arm just announced its
first quarterly earnings report after its IPO, with the market generally pleased with the past three months of revenue but wary of the guidance given for the next quarter.
In my view, there are good reasons to believe that Arm has great years ahead of it with expansion into new markets and new revenue streams, but also a few headwinds that put long-term growth at risk.
Arm is most often associated with the explosion of the smartphone market, and for good reason. With few exceptions, at the heart of every smartphone today is a chip based on Arm technology, including those from Apple
AAPL and Samsung
KR:005930. While the handset space has been problematic for companies recently with the softness of sales in China, indications are that the region is picking back up,
with a note from Qualcomm QCOM in its latest earnings to underscore that point. A reinvigorated smartphone market, with the help of on-device AI adoption, will improve the outlook where the company’s largest revenue stream is tied.
There are many areas of growth for Arm outside of the smartphone market. The PC space is getting active, as
Qualcomm announced a new Snapdragon processor last month that’s meant to displace Intel
INTC and AMD
AMD. Qualcomm’s new Oryon core powering the chip is based on Arm architecture. And recent
rumors of Nvidia and AMD entering into the Windows-on-Arm chip market gives Arm yet another avenue.
As the automotive market becomes more about computing and assisted driving, Arm-based products are going to be at the heart of that transition. Qualcomm is one of the leaders in this space as well, mostly utilizing Arm technology. But other Arm partners including NXP Semiconductors
NXPI, Renesas Electronics
JP:6723 and Cadence Design Systems
CDNS are involved in the rollout of automotive technologies from advanced driver-assistance systems to digital cockpits, and all are integrating Arm processors of some kind. This segment
is expected to grow at close to a 10% CAGR for at least the next five years and offers a significant revenue opportunity.
Crucially, Arm has also made progress in the data center segment with its Neoverse family of IP that is targeted at powering cloud- and edge server infrastructure. As more data centers look to find ways to improve or maintain performance while lowering fixed costs of power and space, the advantages that Arm CPUs have in efficiency and scalability shine. And while the data center segment has a been a target for Arm since before the AI revolution, its significant partnership with Nvidia, the clear leader in the enterprise AI race, means that Arm-based products like the
Nvidia Grace CPU will drive revenue and relevancy.
Read:
Big tech is battling to put AI on your PC, laptop and smartphone
In its most recent earnings report, Arm said that more than 7.1 billion devices had shipped this past quarter with Arm technology inside them. That’s a stunning number and one that tells you how deeply embedded and how pervasive the Arm architecture is in our connected world. We aren’t just talking about companies like Apple, Qualcomm, and Samsung, but also Toshiba
JP:6502, NXP, and Tata Communications
IN:500483. Even Intel and AMD are utilizing Arm designs for some portion of their product lines.
Moreover, Arm CEO Rene Haas
mentioned in a recent interview with CNBC’s Jim Cramer that the strong increase in licensing revenue that Arm saw in this quarter’s earnings report is a “strong indicator for R&D investment.” This is good news for Arm — the more product development that is happening today on its IP means that future products released to market will be based on that R&D work, cycling back to more revenue and market share for Arm.
Risks to the bullish case
Perhaps the biggest risk to Arm is competition. Not from the world of x86 processors that are trying to not be displaced by Arm designs, but by another low power architecture. RISC-V (pronounced “risk five”) is a competing instruction set architecture (ISA). That basically means it is based on a different set of computer microinstructions, not compatible with either Arm or x86 designs.
RISC-V is an “open” design, meaning that, at least in theory, it is free to utilize for both academic and commercial use cases. This is obviously an advantage over the Arm architecture, where companies must pay a licensing or royalty fee to design their own Arm CPU or to use one of the cores designed by Arm itself. This openness also means that companies and the RISC-V community are encouraged to share best practices for designs, improving performance and time-to-market.
Many tech companies are already using RISC-V for some of their platforms. For example, Qualcomm’s Lu Dai sits on the RISC-V board, as does Nvidia’s Frans Sijstermans. Qualcomm announced a
RISC-V based wearable platform, and Alphabet’s Google
GOOGL announced OS support for it.
How big is this existential risk to Arm? The truth is that migrating or building a RISC-V core is a very heavy engineering lift. Though I don’t have specifics on pricing, if a customer is going to license a core based on RISC-V from a company like SiFive, one of the primary advantages over Arm (cost) seems to fall away.
Arm should take this risk to its business model seriously, and it appears to be doing so. There have been shifts in programs offered by the company including a “
flexible access” model that offers no-cost access to Arm IP for companies that are in the startup stage, clearly targeting many potential customers of the RISC-V ecosystem.
The other big risk for Arm is finding a way to get credit and recognition for its value in the tech space. Much better-known companies such as Intel, AMD, and Qualcomm themselves struggle to maintain brand recognition and brand value as a component company in the products and services that people use every day. Qualcomm makes the modem in almost every flagship smartphone today, and Intel powers 75%+ of the laptops sold each year, but few consumers recognize that fact or even care.
Arm is even one more step removed from that; its designs, for example, power the Snapdragon processors that enable flagship Samsung handsets. Getting credit for that enabling work, from the investor market as well as the consumer (and to some degree a share of wallet) is a difficult task.
These headwinds aside, the next five years and beyond for Arm look strong. Its leadership in the smartphone market likely will not be challenged and the areas of growth, from PCs to AI to cars, offer significant revenue upside.
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