To The Moon

In my previous post, "Is Arm expensive? How much Can it rise on the First day of Trading?", I explored the financial situation of Arm, and judging by historical valuations, Arm doesn't leave much room for a secondary market.

Despite the high valuation, Arm is still getting money rush, and there are rumors that the company has been six times oversubscribed. The IPO price may exceed the ceiling.

There are many articles praising Arm, but the repetition is nothing new. This article will talk about the disadvantages of Arm.

Arm is in a monopoly position in smartphone chip architecture, whether it is iOS or Android, it is Arm's cluster. Iin the foreseeable future, this monopoly is difficult to shake.

This inevitably reminds people of $ASML Holding NV(ASML)$, the overlord of EUV lithography machin. Thanks to this absolute monopoly, the company's price-to-earnings ratio is perennially high:

Although they both are monopolies, there are differences in the nuances, such as customer relations.

The relationship between ASML and customers is very harmonious, and even the development of lithography machine is inseparable from the cooperation of customers, such as in the 1990s, the light source wavelength of lithography machine was stuck in 193nm, which has become a difficulty in front of the whole industry.

At this time, $Taiwan Semiconductor Manufacturing(TSM)$ engineer Ben-Jian Lin proposed to add a layer of water between the lens and the silicon wafer, and the original 193nm laser was refracted, directly across the 157nm rift, and reduced to 132nm!

ASML adopted this suggestion, cooperated with TSMC to develop infiltrating lithography machines, and became the leader of lithography machines.

However, the relationship between Arm and customers is not harmonious, mainly because its business model is patent licensing. Arm's pricing and constraints are very strict, such as in April this year, Arm changed the charging model.

Previously, customers paid a technology licensing fee to buy Arm's IP license, the price depends on the complexity of the licensing technology. Arm will also take a certain royalty based on the chip manufacturer's processor price, and the copyright is calculated according to 1% or 2% of the price of a single chip.

In the future, Arm plans to no longer charge manufacturers royalties for the use of its designs based on "chip value", but based on "terminal value", hoping to boost patent revenue significantly.

Many terminal manufacturers angrily criticize: "Arm is blatantly grabbing profits with customers, it is sucking the blood of partners, it is simply a moth!"

Patent hegemony has also triggered a war between Arm and its big customer $Qualcomm(QCOM)$. In August 2022, Arm suddenly turned against Qualcomm after the acquisition of Nuvia, and the two sides almost went to court on patent licensing issues.

In the lawsuit between Qualcomm and Arm, the core problem exposed is that Arm's strict control over downstream manufacturers. For esample, Arm is expected to prohibit manufacturers from freely selecting GPU cores in the future, which means that Qualcomm's exclusive advantage will be gone.

In addition, not only is the GPU problem, Arm also requires semiconductor manufacturers not to use any configuration outside the public domain architecture, such as NPU, ISP and other core responsible for the important functions of the smartphone , they can only be set in accordance with the part provided by Arm.

Therefore, Qualcomm is actively laying out the RISC-V architecture and finding ways to get rid of the shackles of Arm.

RISC-V architecture is an open instruction set architecture (ISA) based on Reduced instruction set computing (RISC) principle. It has the advantages of low power consumption, low cost, open source, Modular, simplicity, small area and high speed.

At present, RISC-V architecture has been widely used in Internet of things devices. According to the RISC-V Foundation statistics, RISC-V architecture chip shipments have exceeded 10 billion in July 2022 , and expected to exceed 80 billion in 2025.

Although there are not many applications of RISC-V architecture in smartphone chips, the industry is already full, and the potential for future development is not as good as that of the Internet of things.

For example, according to the statistics, global smartphone shipments have begun to decline since 2015:

Looking to the future, this trend is difficult to break. Arm can only increase revenue by increasing the number of kernels and increasing patent licensing fees.

Outside the mobile phone market, Arm does not have a monopoly position. For example, in the cloud computing, network equipment, automotive and consumer electronics markets, Arm's market share is 10.1%, 25.5%, 40.8% and 32.3%, respectively.

Given Arm's dominance, in other devices, Arm may face competition from the RISC-V architecture.

From Arm's previous stock price trend, its brilliant moment is the rise of smart phones, and after SoftBank acquired Arm, global mobile phone shipments peaked:

Although the magnificent wave of mobility has calmed down, according to Arm Roadshow news, management sees revenue growth of about 11% in fiscal year 2024, 20% in fiscal year 2025, and about 15% in fiscal year 2026.

This growth rate is not much different from when SoftBank acquired Arm, and the certainty brought by monopoly is still amazing: