ARM Hits Record High Today. What Are the Reasons Behind the Surge?

Arm's current business model relies on two revenue components. The company earns fixed license fees in advance when it provides intellectual property (IP) to its partners and also receives variable royalties from its partners for every chip shipped that incorporates ARM IP. The license fees typically range from approximately $1 million to $10 million. Royalties are generally calculated at 1 to 2% of the chip's sale price. The asset-light model means that ARM does not bear material costs. Its gross profit margin of 97.2% is even higher than Nvidia's.

Besides, the Financial Times has reported that Arm plans to calculate royalties based on the average selling price (ASP) of the mobile device itself, instead of the ASP of the chip. According to the Financial Times, with this new business model, Arm could potentially earn several times more revenue for each design sold, given that the average smartphone is priced significantly higher than the chip it contains.

In the past, the Wintel alliance formed by Intel and Microsoft, which entered the market earlier, has formed strong user inertia, causing the X86 architecture to become the mainstream of PCs. However, the emergence of AI PCs is expected to increase the market share of the ARM architecture.

Arm's customer list spans the entire technology industry in recent years. For example, Apple uses the Arm instruction set to design processor chips for iPhones and Mac computers; Amazon relies on Arm's designs to develop its Graviton server processors for data centers, and Qualcomm and MediaTek are major users of Arm's smartphone processor blueprints, with other customers Also includes Google, Microsoft and Nvidia.

On June 18, Microsoft officially announced the launch of the first batch of Windows 11 AI PCs - the new Surface Pro and Surface Laptop, opening a new era of AI PCs. Microsoft OEM partners Dell, Acer, Asus, HP, Lenovo, etc. will also successively launch Windows 11 AI PCs, which will be available starting from June 18. Copilot+ PC is equipped with Qualcomm Snapdragon X Elite and Snapdragon X Plus processors, which improves performance by 90% compared to Surface Pro 9, and uses Qualcomm Oryon CPU customized based on ARM architecture.

In terms of pricing, ARM's new generation architecture V9 has doubled its royalty price compared to ARM V8, and the increase in V9's revenue share from 10% in the last quarter to the current 15% shows ARM's pricing power. The number of newly signed customers continued to grow despite price increases.

The indicator of RPO (Remaining Performance Obligations) was up 45% year-over-year and up slightly sequentially driven by multiple high-value, long-term agreements. ARM’s RPO represents revenue that will be recognized in future periods.

While Arm holds a dominant position in the smartphone market, it is not the sole option available to device manufacturers. Arm's decision to raise the costs for its customers could potentially fuel increased interest in the open-source RISC-V architecture, a royalty-free alternative that originated in 2010 from scholars at the University of California, Berkeley. Several chip startups have already started to ship products based on RISC-V designs. Companies like Ventana Micro Systems Inc. and SiFive Inc. have entered the market, currently tailoring their products primarily for data center workloads.

"RISC-V is attracting developers quite strongly," stated Rob Enderle, an analyst with Enderle Group. He further noted a potential issue, indicating that Arm's pricing strategy could raise concerns with regulatory bodies such as the Federal Trade Commission (FTC) and the European Commission, who may view it as an exertion of monopoly power.

Since AI PCs have just been released and their market acceptance has not yet been fully verified, there is still uncertainty in the market space of ARM-based PCs. Besides, Arm's Price-to-Sales is over 50, higher than the average for technology companies. This means that only a significant increase in Arm's sales growth can make the current valuation more reasonable.

Source: Anandtech, Arm Holdings