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> But Arm have made a decent business ARM is making peanuts compared pretty much all the companies that actually make high-end chips. Their IP seems to be wor

by qwytw 3y ago

> But Arm have made a decent business ARM is making peanuts compared pretty much all the companies that actually make high-end chips. Their IP seems to be worth much more than the business.

rwmj 3y ago
Just because Arm isn't huge, it's still not nothing. They're about to go into a floatation to try to raise $50-55 billion, which is not too shabby! (Even if it's down from the original target of over $60b).
- qwytw 3y ago
  True (assuming the stock price doesen't crash immediately after the IPO) but still it's not really justifiable based on their current financial figures or future growth prospects. I'm not even sure what the valuation this valuation might even be based on (which admittedly applies to a bunch of other companies which actually end up doing quite well). They might conceivably be worth 100 P/E as an acquisition but an IPO would only make it less likely? $50-55 billion would mean that ARM is more overvalued than Nvidia and Nvidia actually has a realistic chance to grow into that valuation.
- brucehoult 3y ago
  "Try" is doing a lot there. I can't see how Arm is even worth the $32 billion SoftBank paid for them now. RISC-V didn't exist outside of Berkeley in 2016 when SoftBank bought Arm, but now it's becoming a serious rival and especially a serious limitation on how much Arm can raise prices. Arm have around 2.7 billion in annual sales with $500m or $600m of profit. That makes $32b a P/E ratio of 50 to 60, and $50b a P/E ratio of 80 to 100. In simple terms, if you pay $50 billion to buy Arm, and they make the same profit every year as they are making now, it will take 80 to 100 years for you to make your investment back. It's like putting your money into a bank paying 1% interest, but a lot riskier. Such P/E ratios can only be justified by the company and its profits growing rapidly. Arm's revenue actually fell 1% from 2022 to 2023. The last four years have been roughly 2.0, 2.7, 2.75, 2.7. Is that a peak, and it's only downhill from now on, because of RISC-V (or otherwise). Or will they start to grow again? Either way, it sure doesn't look like the very high annual growth rate needed to justify a price of $30b let alone $50b.
  - OhMeadhbh 3y ago
    > In simple terms, if you pay $50 billion to buy Arm, and they make the same profit every year as they are making now, it will take 80 to 100 years for you to make your investment back. But that's not how you make money by purchasing companies. You make money by buying the company low and then selling the company high. So if you bought ARM for $50B and sold it for $70B in 5 years, you would make $20B on an investment of $50B But I'm certainly not in the position to guess how much ARM would appreciate over the next 5 years. I pulled that example out of a hat (or some other, less polite to mention part of my anatomy.)
    - brucehoult 3y ago
      Sure, that's the principle, but the question is: where do you find the Bigger Fool? Fundamentals count for something, no?
fidotron 3y ago
It is worth considering why you expect anyone else could be more successful. On the one hand you have ARM investors wanting them to extract more revenue, and the ARM customers do not want to pay more or have more restrictive licenses. They are in a bit of a nasty equilibrium but one that will hit all IP companies eventually. An old colleague of mine has got into the idea businesses are now going to put the big squeeze on all suppliers that count as part of gross margins, which would include ARM, while essentially ignoring operational costs. The implication would be companies looking to use RISC-V would be more inclined to pay chip design houses on a contract basis more upfront than have anything including royalties. I dislike the idea but think he is right, and that the future of electronics is about to go through the same sea change that software did with open source and the emergence of SaaS.
rbanffy 3y ago
> ARM is making peanuts ARM is a fabless pure play IP house. The big bucks are not in IP design but in manufacture.
- OhMeadhbh 3y ago
  Yeah, but it's also where the big costs are.
  - rbanffy 3y ago
    It's big bucks coming in and even bigger bucks coming out.

by qwytw 3y ago

> But Arm have made a decent business ARM is making peanuts compared pretty much all the companies that actually make high-end chips. Their IP seems to be worth much more than the business.

rwmj 3y ago

Just because Arm isn't huge, it's still not nothing. They're about to go into a floatation to try to raise $50-55 billion, which is not too shabby! (Even if it's down from the original target of over $60b).

qwytw 3y ago
True (assuming the stock price doesen't crash immediately after the IPO) but still it's not really justifiable based on their current financial figures or future growth prospects. I'm not even sure what the valuation this valuation might even be based on (which admittedly applies to a bunch of other companies which actually end up doing quite well). They might conceivably be worth 100 P/E as an acquisition but an IPO would only make it less likely? $50-55 billion would mean that ARM is more overvalued than Nvidia and Nvidia actually has a realistic chance to grow into that valuation.
brucehoult 3y ago
"Try" is doing a lot there. I can't see how Arm is even worth the $32 billion SoftBank paid for them now. RISC-V didn't exist outside of Berkeley in 2016 when SoftBank bought Arm, but now it's becoming a serious rival and especially a serious limitation on how much Arm can raise prices. Arm have around 2.7 billion in annual sales with $500m or $600m of profit. That makes $32b a P/E ratio of 50 to 60, and $50b a P/E ratio of 80 to 100. In simple terms, if you pay $50 billion to buy Arm, and they make the same profit every year as they are making now, it will take 80 to 100 years for you to make your investment back. It's like putting your money into a bank paying 1% interest, but a lot riskier. Such P/E ratios can only be justified by the company and its profits growing rapidly. Arm's revenue actually fell 1% from 2022 to 2023. The last four years have been roughly 2.0, 2.7, 2.75, 2.7. Is that a peak, and it's only downhill from now on, because of RISC-V (or otherwise). Or will they start to grow again? Either way, it sure doesn't look like the very high annual growth rate needed to justify a price of $30b let alone $50b.
- OhMeadhbh 3y ago
  > In simple terms, if you pay $50 billion to buy Arm, and they make the same profit every year as they are making now, it will take 80 to 100 years for you to make your investment back. But that's not how you make money by purchasing companies. You make money by buying the company low and then selling the company high. So if you bought ARM for $50B and sold it for $70B in 5 years, you would make $20B on an investment of $50B But I'm certainly not in the position to guess how much ARM would appreciate over the next 5 years. I pulled that example out of a hat (or some other, less polite to mention part of my anatomy.)
  - brucehoult 3y ago
    Sure, that's the principle, but the question is: where do you find the Bigger Fool? Fundamentals count for something, no?

fidotron 3y ago

It is worth considering why you expect anyone else could be more successful. On the one hand you have ARM investors wanting them to extract more revenue, and the ARM customers do not want to pay more or have more restrictive licenses. They are in a bit of a nasty equilibrium but one that will hit all IP companies eventually. An old colleague of mine has got into the idea businesses are now going to put the big squeeze on all suppliers that count as part of gross margins, which would include ARM, while essentially ignoring operational costs. The implication would be companies looking to use RISC-V would be more inclined to pay chip design houses on a contract basis more upfront than have anything including royalties. I dislike the idea but think he is right, and that the future of electronics is about to go through the same sea change that software did with open source and the emergence of SaaS.

rbanffy 3y ago

> ARM is making peanuts ARM is a fabless pure play IP house. The big bucks are not in IP design but in manufacture.

OhMeadhbh 3y ago
Yeah, but it's also where the big costs are.
- rbanffy 3y ago
  It's big bucks coming in and even bigger bucks coming out.