Can Son Masayoshi recreate the capital myth?

Author | Liu Baodan

Editor | Zhang Xiaoling

Riding the wave of global AI, ARM, a star company specializing in chip design and development, has created a long-awaited IPO frenzy.

On the morning of September 14th, Eastern Time, ARM opened with a 10% increase, reaching $56.10, and its stock price rose 25% on the same day, closing with a market value of $65.248 billion (equivalent to RMB 474.9 billion).

As the largest IPO in the world this year, ARM has attracted much attention. The day before, ARM confirmed its IPO price at $51, with a market value of approximately $54.5 billion, ranking among the top in the history of U.S. stocks, second only to a few star companies such as Alibaba, Facebook, and Uber.

In the past two years, due to factors such as high inflation, interest rate hikes by central banks in Europe and the United States, and the Russia-Ukraine conflict, global economic expectations have weakened, and investors' enthusiasm for technology stock IPOs has waned. It can be said that ARM has single-handedly boosted the heat of the capital market.

Behind ARM's high valuation is not only the capital operation of SoftBank's Masayoshi Son and Goldman Sachs, but also the investment from technology giants, and it is also because ARM has caught the wave of artificial intelligence.

ARM has a unique business model. Although it is a semiconductor company, it does not manufacture chips. Instead, it designs chip architectures, which is the foundation and prerequisite for chip production, and the company charges intellectual property licensing fees.

In the fiscal year 2023, ARM only achieved revenue of $2.679 billion (equivalent to RMB 19.5 billion). How can it support a market value of over $400 billion?

This is inseparable from the efforts of Goldman Sachs. After ARM went public, SoftBank still holds 90.60% of the shares, which means that there are not many publicly traded shares of ARM. As the lead underwriter, Goldman Sachs has put a lot of effort into ARM's listing. It is well known that Goldman Sachs relies on investment banking business, but due to the prolonged slump in IPOs, its performance has been under pressure for a long time.

Masayoshi Son also brought in a group of technology giants as shareholders. As a global leader in chip IP, ARM is a guest of honor for technology companies such as Apple, Samsung, NVIDIA, AMD, Google, and TSMC. The latter chose to become a cornerstone investor of ARM in order to better control cooperation in the chip field.

With the joint presence of technology giants, it is equivalent to providing an insurance policy for ARM, further boosting investors' optimistic sentiment towards ARM's valuation.

More importantly, artificial intelligence has entered a period of explosive growth, driving market demand for chips, and ARM has also benefited from this.

Masayoshi Son has great ambitions for artificial intelligence. He has mentioned more than once that ARM may play an important role in the field of AI in the future and achieve "exponential growth." The company also promises in its prospectus to provide features related to AI and machine learning in its latest ISA, CPU, and GPU products.

However, whether the feast of ARM's listing is due to its strength and potential or a bubble driven by capital, such doubts have already begun to linger in the market.

Last year, ARM's profit was only $524 million, but its price-to-earnings ratio was close to 170 times, even surpassing NVIDIA's price-to-earnings ratio of 110 times. The outside world is worried that ARM's performance is not enough to support a market value of over $60 billion. And, ARM is currently still on the edge of AI, focusing more on the architecture foundation of CPUs rather than creating the architecture of GPUs and AI-specific chips needed for large models.

Huatai Securities believes that in this wave of AI, ARM architecture chips do not have an advantage in accelerating computational tasks in data centers, so the overall benefit to the company is limited.

One possibility is that ARM may benefit from the emphasis on inference in large models. Well-known tech blogger Pete Warden recently stated that CPUs are "laughably slow" in training large models, but when inference dominates the entire budget, CPU inference costs are lower and demand is bound to exceed GPUs.

ARM also stated in its prospectus that CPUs are critical in AI systems, as they either fully handle AI workloads or run AI in conjunction with GPUs (graphics processing units) and NPUs (neural processing units).

However, this is still just speculation.

From performance to future growth expectations, especially how much ARM can capitalize on the AI dividend, remains unknown. Moreover, ARM's listing has raised concerns about its pricing power, and signs of "de-ARMization" have already emerged.

Beyond ARM, investors are also divided on the valuation of NVIDIA, the biggest beneficiary of the AI wave so far.

Legendary investor and chairman of investment firm Research Affiliates, Rob Arnott, recently warned that NVIDIA's stock has formed an asset bubble after its astonishing rebound this year, and if the bubble bursts, it could trigger a broader market crash.

Although NVIDIA has sold well, it is still unclear whether companies that buy its products can achieve real performance growth from AI applications.

Perhaps noticing the skepticism surrounding high valuations, ARM's management recently made strategic adjustments in an attempt to instill more confidence.

As for future growth highlights, ARM has provided guidance, including a cloud computing market growing at a rate of 17% per year, a 16% increase in market share in the automotive market, and stable growth in royalties, which account for the majority of revenue.

With a market value of over 400 billion, ARM has gone public for the second time. In 1998, it was listed on both the London Stock Exchange and NASDAQ, and in 2016, it was acquired and privatized by SoftBank for $32 billion.

Seven years later, ARM is back, carrying Masayoshi Son's dream and becoming a hot commodity in the capital market.

As the mastermind behind ARM's listing, Masayoshi Son is eager to win.

With a 2000-fold return on investment from Alibaba's IPO, Masayoshi Son has become a globally renowned investor. However, in recent years, his bets on WeWork and Didi have failed one after another. Behind him, SoftBank and its Vision Fund have continued to incur losses, especially the latter, which has lost $65 billion in two years. They are in desperate need of a successful investment case. In order to win this battle, 66-year-old Masayoshi Son retired last year and handed over SoftBank to executives such as Yoshiaki Goto. He then focused on the listing of ARM.

On the first day of ARM's listing, Masayoshi Son stated that artificial intelligence has the potential to surpass human intelligence, and ARM is a "core" beneficiary of the AI revolution.

However, the value of this statement still needs to be verified over time.