Arm IPO – Second Impressions

We continue to parse the Arm IPO prospectus, and are gradually coming to some conclusions which we will detail in soon. Spoiler alert – we need a thesauruses to find alternatives to the word ‘challenging’. However, as we work through the filing we continue to find many interesting pieces of information.

First is this gem:

We will not receive any of the proceeds from the sale of ADSs by the selling shareholder in this offering (including any proceeds from any sale of ADSs pursuant to the underwriters’ option to purchase additional ADSs). All net proceeds from the sale of ADSs in this offering will go to the selling shareholder.

Which if you think about it sums up the whole exercise. Arm gets none of the proceeds. We recall an Arm executive warning that if the Nvidia deal failed and the company had to go public it would have to significantly cut costs. Now we know what he really meant.

However, far more encouraging (sortof) the company also provided us with a market share analysis of each of their end-market segments. their total addressable market (TAM). For some reason they presented this in text form, so we put together the chart below. Note the dollar amounts refer to the sales of their customer’s chips, and as noted yesterday, Arm only captures a small share of this. The portion of the market they actually sell into (the Serviceable market or SAM) is $98 billion, which means they can tap into about 50% of all logic semis revenue.

Source: Arm company data. Note Arm’s share for Consumer Electronics and Other Mobile are based on our estimates

Again, this table tells us a lot about the company’s prospects. Automotive and Data Center are the fastest growing segments for the company, but we consider both highly competitive. The automotive market is undergoing significant change, and while Arm is well positioned with many chip vendors here, the race has a long way to go, and Arm’s position is by no means certain. Not for nothing, we suspect that much of Arm’s market share here consists of Qualcomm design wins, and they are of course suing Qualcomm. Data Center is also growing, and the fact that they have carved out 10% here is a big achievement. However, much of that is built on the back of just two companies – AWS Graviton and Ampere. We also want to point out we do not believe the numbers for Industrial/Embedded – this market is growing strongly right now with Chinese chip designers piling in, and they are largely using RISC V. We think that market is growing much faster than 6.7% (at least in terms of units) but that Arm’s share is significantly lower. Overall, we see this data as the proverbial 50% glass. Glass half full – they are growing share in the fastest growing markets. Glass half empty – they are heavily reliant on some of the slowest growing markets.

Moving on, the Risk Factors section of the filing is full of interesting details.

  • Of course Arm lists RISC V as a competitive risk factor, but makes fairly few mentions of it, highlighting x86 as well as internally developed alternatives equally.
  • The company cautions that US trade restrictions on semis exports to China may expand to cover Arm intellectual property (IP) or crimp customers’ sales. So far the US government has remained silent on the topic of IP, but it certainly is a risk.
  • Softbank will hold all board seats at Arm, until it drops below 70% control, no independent directors required. Softbank also has full dilution protection. Add to this the fact that Arm is technically listing ADS not common shares. ADS have different voting rights, and while this is standard practice the layer does add a further wrinkle to future governance matters for the company.
  • As we noted yesterday, a Softbank affiliate has taken out an $8.5 billion loan collateralized by the 75% of Arm shares it owns. After the IPO this will be rolled into a new facility which includes covenants about margin calls in the event Arm’s shares decline by an undisclosed amount. This could get messy…
  • Softbank’s internal valuation of Arm is $64 billion, which is a number the press has cited as the target for the IPO. This could also get messy…
  • Qualcomm contributed 11% of Arm’s revenue last year, roughly $300 million.

Finally, in the risks section there is a tantalizing mention of Arm designing custom chips. It has been widely rumored that Arm is going to enter the business of chip design as a way to move up the value chain. They warn that this is risky and could cause conflicts with existing customers, of course it appears in the risk section so all downside is to be expected. That being said, maybe Arm has something more interesting in the works here.

One final note. Arm was an early investor in privately-held Ampere, designer of data center server CPUs. Arm owns 6.8% of Ampere, and they value that stake at $416.2 million (although they have written that down to $389 million). This implies Ampere’s value is $6.1 billion. Relevant in part because we are highly interested in Ampere, but also important because the fate of Arm’s IPO will weigh heavily on Ampere’s prospects for going public next year.

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