NVIDIA rides the AI wave to rake in huge profits. How much attention can Arm, which is about to go public, attract?

The timing of Arm's IPO in the US couldn't be better. Wall Street investment firms are extremely optimistic about the quarterly performance of AI chip leader NVIDIA (NVDA.US) and the outlook for the next quarter, which far exceeds market expectations. As a result, some institutional investors are aggressively flocking to any investment related to artificial intelligence. Wedbush, a Wall Street investment firm, believes that NVIDIA's performance will have a chain reaction on technology stocks, igniting a rebound trend in the second half of the year.

Wall Street is looking forward to the upcoming listing of Arm, hoping to ride the wave of NVIDIA's soaring market value. After all, after more than 18 months of sluggishness in the US IPO market, a large-scale technology giant finally emerged - Arm, the leader in the chip design field. Fund managers from Wall Street are clamoring to invest in the long-depressed IPO market.

Since the beginning of last year, the US IPO window has been basically closed, but recently companies have been listing one after another

For this UK technology company supported by SoftBank Group, the key is to convince investors that, in an oversupply of the semiconductor industry and stagnant Arm sales, Arm can continue to drive valuation expansion as a participant in the field of artificial intelligence.

The IPO application draft shows that Arm's revenue in the previous fiscal year decreased by about 1%, and the quarterly revenue as of June 30 decreased by 2.5% compared to the same period last year. SoftBank, which holds Arm shares, is pushing for an IPO of up to $70 billion. The market is still concerned about the lack of substantial relief in the trend of chip oversupply, coupled with the general decline in global chip stock valuations and Arm's declining performance, which complicates Arm's valuation.

It is understood that this chip design company mentioned artificial intelligence about 50 times in a document, demonstrating its ambitious vision as a participant in the AI field - that is, Arm's central position in the global transition to an era increasingly dependent on artificial intelligence and machine learning. The company plans to conduct its initial public offering (IPO) sometime next month and hold roadshows with investors after Labor Day in the United States.

Although the upward trend of the S&P 500 index driven by NVIDIA on Thursday was short-lived, the tech giant's stock has risen by more than 220% this year, increasing its market value by over $800 billion. This largely reflects the market's belief that NVIDIA is the technology company that can benefit the most from the global wave of AI deployment, considering that this chip company based in California is one of Arm's hundreds of customers. Arm hopes to leverage this to increase funding attention and raise its valuation.

Since SoftBank's acquisition of the company for $32 billion in 2016, the semiconductor market has grown rapidly, coupled with the global AI wave in recent years. SoftBank founder Masayoshi Son plans to ride this wave to boost Arm's valuation.

SoftBank confirmed in the filing submitted this week that it has acquired a 25% stake in the company from the Vision Fund at a valuation of $64 billion. This deal also means that SoftBank founder and major shareholder Masayoshi Son has put everything on the line for Arm's listing in September—if Arm's valuation does not exceed $64 billion, SoftBank will bear the loss. It is widely reported that Arm's valuation target is between $60 billion and $70 billion, as the chip design company seeks to profit from investors' enthusiastic investment sentiment in AI.

This lays the foundation for Arm to break the freeze in the US IPO market. SoftBank, the parent company of Arm, is optimistic about the prospects of artificial intelligence and hopes to benefit from the profits achieved by most of its semiconductor industry customers this year. Since the beginning of this year, the global chip stock benchmark, the Philadelphia Semiconductor Index, has risen by 37%, more than twice the increase of the S&P 500.

Since ChatGPT swept the world at the end of last year, the market has been cheering for companies entering the field of artificial intelligence. Small and medium-sized companies related to AI, such as Super Micro Computer (SMCI.US), C3.ai (AI.US), and Palantir Technologies (PLTR.US), have all doubled their stock prices this year.

Data compiled by institutions shows that only $14.4 billion has been raised through IPOs on US exchanges this year, a decrease compared to the same period last year, and a 94% plunge from the record-breaking year of 2021. In this case, Arm can help break this downturn, which has put most companies in a wait-and-see state while waiting for a more attractive environment.

Steve Sosnick, Chief Strategist at Interactive Brokers, said in an interview, "If there is a company that will become an open target in the sluggish IPO market, it seems to be Arm." "Our enthusiasm for artificial intelligence may not have reached its peak yet, but we may be very close. If you are trying to promote an IPO and can reasonably say that they have adapted to artificial intelligence, then this is certainly a favorable time." The scarcity of the IPO market this year has improved compared to the overall weak market situation in 2022, which has dampened market sentiment. Despite a slight pullback in the three major US stock indexes this month, the S&P 500 index has rebounded to the level of April 2022, and the VIX fear index has remained below 20 since the end of March - a key level for the stock issuance pricing market that seeks lower volatility.

Arm, who is trying to ride the wave of AI popularity, seems to be a "peripheral figure" in the AI field

Chris Smith, portfolio manager of Antero Peak Group under Artisan Partners, said: "I believe Arm will definitely cheer for Nvidia's excellent quarterly performance, which I think will be much easier for them." The firm manages over $3 billion in assets. Smith said on the phone, "Nevertheless, Arm and its peers have much less actual exposure to artificial intelligence than Nvidia."

The Arm architecture is mainly applied in the field of smartphones due to its low power consumption, high performance, and high customizability, which are well-suited for the needs of mobile devices. However, in the server field - which is also one of the fundamental infrastructures of the AI field - the AI server field is mainly dominated by x86 architecture and Nvidia's Turing, Volta, Ampere GPU architectures. Arm architecture is gradually gaining recognition in the server field, especially in lightweight and low-power servers. However, its market share is very, very small. Therefore, it can be seen from Arm's core business dominated by smartphones that the company seems to be an "outsider" to the AI boom.

The AI field usually involves deep learning models and large-scale computing, which may rely more on high-performance server GPUs and dedicated AI chips, which are currently not closely related to the Arm architecture. From the current market perspective, the core of the stock market's AI speculation still lies in the computing power and software sectors. At most, Arm can take advantage of the AI boom and Nvidia's soaring stock price. Nvidia's GPUs are the most critical hardware for AI training and inference, but GPUs need to be used in conjunction with CPUs, and Arm happens to excel in designing high-energy-efficient CPUs. For example, Nvidia's new generation data center superchip GH200 includes CPUs based on the Arm architecture.

However, CPUs only play a supporting role in the important process of AI training and inference, and their specific quantity requirements and purchase prices are far lower than GPUs. This also explains why the stock price and market hype of the CPU server leader Intel (INTC.US) are far behind Nvidia.