Arm’s processors are already playing a significant role in AI workloads, particularly in smartphones.
As investors eagerly await the Initial Public Offering (IPO) from Arm Holdings Ltd, the semiconductor industry is basking in the glow of the Artificial Intelligence (AI) boom, exemplified by Nvidia Corp (NASDAQ: NVDA) which has printed a staggering 200% rally this year.
However, a recent report from CNBC highlighted that Arm’s proposition differs significantly from Nvidia’s in terms of its business model and growth drivers.
Arm Holdings IPO Ambitions
British semiconductor and software design company Arm Holdings is gearing up for a blockbuster Initial Public Offering, aiming to raise nearly $5 billion, which would value the company at over $54.5 billion. The high demand for Arm shares, possibly priced at the top of the indicated range or even higher, reflects investor enthusiasm for both semiconductors and AI.
Part of this enthusiasm can be attributed to Softbank Group Corp (TYO: 9984), Arm’s parent company, positioning the mega startup as an AI-centric player. Arm’s IPO prospectus emphasizes its central role in the transition to AI-enabled computing. However, analysts caution that Arm’s journey in the AI space may differ from Nvidia’s, at least in the near term.
While both companies operate in overlapping domains, their business models and trajectories differ significantly. Nvidia has experienced a meteoric rise in recent years, driven by its prowess in developing high-performance GPUs (Graphics Processing Units) ideally suited for AI and machine learning applications. This niche focus has allowed Nvidia to capitalize on the AI boom, particularly in the data center and gaming sectors.
In contrast, Arm operates in a different capacity within the semiconductor landscape. Arm is renowned for designing the blueprints or “architectures” of various semiconductors. These architectures encompass the overall design, including components and programming language instructions, which other companies utilize to manufacture chips.
Notably, Arm’s primary focus lies in Central Processing Units (CPUs). Arm derives a significant portion of its revenue from royalties and architecture licensing, with over 50% coming from smartphones and consumer electronics. As of now, Arm has not experienced a substantial AI-driven boost.
Jamie Mills O’Brien, an investment director at Abrdn, highlighted that Arm’s near-term growth revolves around mobile technology and royalty increases rather than AI. He noted, “In the longer term, I think Arm is trying to focus investors’ minds on the potential… AI in the edge, AI in the data center, but at the moment that’s not a huge part of the company’s exposure.”
Arm’s Current Role in AI at the Edge
Arm’s processors are already playing a significant role in AI workloads, particularly in smartphones. Many of the AI features we encounter daily, such as voice recognition and image filtering, are efficiently processed by Arm-based processors. However, the revenue generated from these AI applications may not flow to Arm for several years, according to experts.
Richard Windsor, founder of Radio Free Mobile, notes that while AI at the edge holds immense promise in terms of economic efficiency, service quality, privacy, and security, Arm is not currently reaping the benefits. The expectation is that Arm’s AI-focused efforts will take time to mature and become significant contributors to the company’s revenue.
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