Arm’s Potential as an AI Player May Take Years to Materialize
Investors are eagerly eyeing Arm as the next potential Nvidia, considering the semiconductor industry’s boom and the demand for artificial intelligence (AI). However, analysts are cautioning that Arm’s potential as an AI powerhouse may take several years to materialize and generate significant revenue.
While Nvidia’s stock has soared by 200% this year, Arm is preparing for a blockbuster initial public offering (IPO), aiming to raise nearly $5 billion and achieve a valuation of over $50 billion. The IPO has attracted high demand, with indications that Arm may price its shares at the top or even above its indicated range.
Part of the hype surrounding Arm’s IPO stems from SoftBank’s positioning of the British chip designer as an AI company. Arm’s IPO prospectus emphasizes the company’s centrality in the transition to AI-enabled computing. However, experts argue that Arm differs from Nvidia and is unlikely to benefit from the AI boom in the near-term.
AI technology, particularly generative AI like OpenAI’s ChatGPT, relies on vast amounts of data and requires substantial computing power for training AI models. Nvidia specializes in graphics processing units (GPUs) that are essential for training and running these AI models in data centers.
In contrast, Arm focuses on designing semiconductor architectures, primarily central processing units (CPUs). Arm-based CPUs are present in 99% of smartphones worldwide, including those from major players like Apple. Although CPUs are sometimes used alongside GPUs in data centers, Arm generates most of its revenue through royalties and licensing its architecture, with more than 50% sourced from smartphones and consumer electronics.
Analysts suggest that Arm’s growth in the near future will be driven by mobile and royalty increases rather than AI. Jamie Mills O’Brien, Investment Director at Abrdn, emphasized that AI is currently not a significant part of Arm’s exposure. Arm’s AI potential is more likely to manifest in edge computing, where AI processing occurs on devices like smartphones rather than in the cloud. Arm is designing low-power, high-performance chips tailored for AI applications carried out on the edge.
For Arm to become a major player in AI on the edge, devices will need optimized chips capable of performing AI computations efficiently. Arm stated in its IPO filing that its processors already power AI workloads, such as voice recognition and image filtering, on smartphones currently in the market. However, the revenue impact of AI is expected to take at least three to five years to materialize for Arm.
Richard Windsor, founder of Radio Free Mobile, acknowledged the long-term potential for Arm in AI but highlighted that the company is not currently experiencing revenue gains from AI. “SoftBank has been required to sell Arm as an AI company like Nvidia,” Windsor explained. “But those revenues are not accruing to Arm right now.”
While Arm’s IPO presents an exciting opportunity for investors, it may be some time before the company fully benefits from the AI boom. The focus on mobile and royalties, along with the prospects of future AI applications on the edge, will likely shape Arm’s growth trajectory in the coming years.