The Six Five Team discusses Arm Goes Public with Successful Debut.
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Transcript:
Patrick Moorhead: Hey, let’s go. Let’s get into the, literally the world’s the largest… With the largest public offering in X years. I don’t know how many years, but it’s been a lot. You and I were on TV multiple times. I think I did CNBC twice. I think you did as well. I did a little segment for Yahoo Finance. By the way, Josh Lipton has departed Apple and is at Yahoo Finance. He was second sharing with John Fork at CNBC. But listen, I’m sure you’ve read all the news because it’s the top news story, but let me break it down for you. This offering was supposed to come out at 51 and they completely fricking blew it away up 24.5% in day one. It was up after hours last night. I think the seminal question is, “Hey, can they keep this going?”
I’m not an equity analyst, I’m an industry analyst, but I do have to weigh in on that. I think the long-term prognosis for Arm is really high, dominant smartphone CPU, dominant consumer electronic CPU, growing in the data center and carrier, they have scale, 250 billion chips. Scale matters for a couple of reasons, primarily the software base. Took them 10 years, almost 12 to build this data center stack. For those watching at home, I think it does take about a decade to do this. Growth opportunities are pretty huge. They might have around 20% of the data center market, but that’s really concentrated in networking storage and security. They have about a 5% share in data center core CPU and the other 95% is AMD and Intel. I do believe that both Microsoft and Google have some custom chips that are coming out very similar to AWS.
Automotive market is huge, right? Going from a thousand pieces of silicon to 3000, there are so many… They cover CPU, they cover GPU, they cover sensors. Many people don’t know this, but Arm actually have automotive sensors, visual sensors for autonomous driving and safety systems. PCs, Apple, a hundred percent Arm. It’s an architecture license, which isn’t a lot of money per unit, but they did certainly stir the pot. You’ve got Qualcomm coming in with Orion, which by the way is also a custom piece of silicon. But what about everybody else?
I do believe that if Qualcomm is successful in this market, it’s going to drag along Samsung, MediaTek, probably a couple other OEMs, maybe even NVIDIA. I wouldn’t be a surprised if NVIDIA does this. The China threats, no different than any other big chip tech company. They might be even a little bit more insulated, even though the percentage is high in China at 25%, they’re not doing things that get on the radar of the US government, like discreet GPUs. A RISC-V, potentially a bigger threat once we see more designs from big cores from a company like Ventana Micro.
But right now, RISC-V is limited to the embedded side, and I would say it’s going to take probably another five years to build out a full enterprise stack. That’s what I got. Congratulations to Rene Haas and the team, your work has just begun.
Daniel Newman: Yeah. This is an exciting moment. The market is longing, dying for something to be exuberant about. This is exuberance at its best. 25 times revenue for a company that actually shrunk last year. I would do that with my company all day long.
Call me. We can make this happen. But it’s like a tale of two cities here. There’s a real story of what’s going on at Arm and there’s some real positives in there. Then there’s this AI story that everybody desperately wants to connect. The real connectivity of the AI story is probably more of an evolving than a revolutionary moment. Meaning you hit on server, you hit on maybe automotive, you hit on content related to AI. But right now most of Arm’s money is made on selling IP to handset makers that go into smartphones. That’s where most of it. Then there’s IoT-
Patrick Moorhead: Yeah, it’s 45% of their business down from 65% when SoftBank bought them.
Daniel Newman: It’s an improvement. It’s been improved by the increase in the networking and increase in server, some automotive content, the PC business. But also, let’s remember, the PC business sucks. Mobile business sucks. Now, having said that, it’s nice because we are probably in the later cycle of what will become an upturn in the near future. I do think AI is going to drive a revolution of PCs and formats. We’ve certainly seen what Arm has accomplished with Apple in the M series. We were both somewhat skeptical that Arm and Apple would get it right. Not only did they get it right, but I think that they’ve done a really tremendous job of working together to build a platform that people love.
Where credit is due, the inclusion of Arm cores inside of advanced compute, accelerated computing, like the Grace Hopper is very indicative of the fact that in the most critical AI applications, Arm has designs that can be utilized to move the AI business forward. These are all things that deserve credit. I think where I probably have the most skepticism is, is their valuation right? Meaning that this company at two and a half billion dollars a year of revenue selling mostly licensing, not so much of this higher margin systems data center and server yet, really worth half of what Intel’s worth at two and a half billion revenue versus like 20 times that. Okay? That’s more my question mark.
I think over the course of the next five years, I actually really believe they will grow into this valuation. The problem is, so as an industry analyst, I say, “Good company, buy.” I don’t actually make buy recommendations, but good company, doing important things. As an investor, I’m looking at this going, “Wow, they have a really long way to go to fit any sort of price earnings valuation.” Because remember, they don’t make very much money if they make money. They’re still right at that newly making money size of company. Their earnings, they’ve improved every year, but they’re still not highly profitable either.
It’s fundamentals versus vision. On the vision side, I really like the company. Fundamentally, it has some work to go, but this was a great moment. Rene Haas deserves all the credit. Because you know what, the one thing that the market is, is the truth, meaning what people spend and what people pay is exactly what the company’s worth in a public market. While I can complain about valuation right now, if I want to buy it, I’m buying it at 70 billion val. Good for Renee and good for the company, good for all the shareholders.
Author Information
Daniel is the CEO of The Futurum Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise.
From the leading edge of AI to global technology policy, Daniel makes the connections between business, people and tech that are required for companies to benefit most from their technology investments. Daniel is a top 5 globally ranked industry analyst and his ideas are regularly cited or shared in television appearances by CNBC, Bloomberg, Wall Street Journal and hundreds of other sites around the world.
A 7x Best-Selling Author including his most recent book “Human/Machine.” Daniel is also a Forbes and MarketWatch (Dow Jones) contributor.
An MBA and Former Graduate Adjunct Faculty, Daniel is an Austin Texas transplant after 40 years in Chicago. His speaking takes him around the world each year as he shares his vision of the role technology will play in our future.
