As Arm, the British chip designer owned by SoftBank, prepares for its blockbuster initial public offering (IPO), investors are eager to see if it can replicate the success of Nvidia, which has seen its stock price surge by a remarkable 200% in the current year. Arm aims to raise nearly $5 billion through its IPO, which could value the company at over $50 billion. According to Reuters, there is substantial demand for Arm’s shares, potentially leading to pricing at the top end of its range or even above it. However, despite these impressive figures, analysts caution that Arm and Nvidia are fundamentally different companies.
Arm’s AI prospects in the near-term
Richard Windsor, the founder of Radio Free Mobile, asserts that Arm is unlikely to experience an immediate boost in revenue from artificial intelligence (AI). The AI wave may not significantly impact Arm’s bottom line for at least the next three to five years. Arm’s primary source of income comes from royalties and licensing its semiconductor architectures, with more than 50% of this revenue generated from smartphones and consumer electronics. Currently, Arm’s growth is driven primarily by mobile technology and royalty increases, rather than AI applications.
Nvidia’s role in AI
In contrast, Nvidia has capitalized on the growing interest in generative AI, a technology exemplified by OpenAI’s ChatGPT. Nvidia specializes in designing graphics processing units (GPUs), which are instrumental in training and operating AI models in data centers. The intense demand for generative AI has significantly boosted Nvidia’s earnings.
Arm’s unique position in the semiconductor industry
Arm focuses on designing semiconductor “architectures,” including components and programming language instructions. These architectures serve as blueprints for other companies to manufacture chips. Arm’s mainstay is central processing units (CPUs), and its designs are integrated into 99% of the world’s smartphones, including those from major players like Apple. While CPUs are used in data centers, they are often combined with GPUs for data training purposes. Arm derives most of its revenue from royalties and architecture licensing, with smartphones and consumer electronics being the primary sources.
Arm’s future in AI
Arm’s potential in the AI arena lies in the “edge” computing realm, where AI processes occur on devices like smartphones rather than in the cloud. To facilitate this, Arm is working on low-power, high-performance chips tailored for AI applications. This shift towards localized AI processing is critical for devices like smartphones and autonomous vehicles, where computing power constraints require optimization. Arm claims that its processors are already capable of efficiently running AI inference applications in existing smartphones.
The path forward for Arm in AI
Despite Arm’s focus on AI at the edge, industry experts predict that it may take three to five years before the company sees a substantial revenue impact. As Peter Richardson, research director at Counterpoint Research, notes, AI on end-devices like smartphones will demand specialized chips and optimized models. While the long-term potential for Arm’s AI involvement is promising, these revenues are not immediately accruing to the company.
SoftBank’s role in promoting Arm as an AI company
SoftBank, Arm’s owner, has actively positioned the British chip designer as a key player in the AI field, similar to Nvidia. While the vision of Arm becoming central to AI-enabled computing is compelling, the tangible financial benefits from this strategy are expected to materialize in the future rather than the present.
While investors are drawn to Arm’s IPO and its potential in the AI landscape, it’s essential to distinguish the company from Nvidia. Arm’s strength lies in its semiconductor architectures, which are ubiquitous in smartphones, but its AI journey is set to unfold gradually. The true test of Arm’s AI prospects will emerge when AI applications become commonplace on edge devices like smartphones, but this transformation is expected to take several years. Investors should recognize the distinctive nature of these two companies and align their expectations accordingly as Arm navigates its path in the ever-evolving world of AI.
