A strange twist in the current obsession with artificial intelligence is the trauma that befalls one of AI’s biggest fans – Masayoshi Son, CEO of SoftBank.
In 2017, Son launched the world’s largest venture capital portfolio – the $100 billion Vision Fund – with the idea that AI would be the most important technology of all time. “The internet has disrupted advertising and retail, basically those two,” Son said in a 2021 interview with Barron’s. “Artificial intelligence is revolutionizing every other industry.”
After much hesitation, investors seem to be jumping on Son’s vision — it’s just not paying off for him, at least not yet. His venture funds lost a total of $4.8 billion. Not good.
But Son and his colleagues still believe AI is the future. In a recent presentation, SoftBank Group (Ticker: SFTBY) noted that sales of AI-related chips are expected to grow 35% annually through 2030. That’s not an empty observation: It ties directly to the prospects for SoftBank’s key holding, UK-based chip design firm Arm Holdings.
SoftBank bought Arm for $32 billion in 2016. In 2020, it agreed to sell the company to Nvidia (NVDA) for $40 billion in cash and stock, but the transaction eventually fell in the face of stiff opposition scrapped by regulators and global chipmakers. the customers are poor.
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SoftBank switched strategies and decided to take Arm public. But even that plan has met obstacles, including the pandemic and the near-complete shutdown of the IPO in 2022.
But there was a ray of light in last year’s IPO gloom of Mobileye (MBLY), an Intel (INTC) spinoff that makes chips, software and cameras used in autonomous vehicles. Mobileye went public in October 2022 amid a horrendous tech sell-off. Intel has halved its expectations for the company’s valuation. But as it turned out, the deal worked. Now at $44, the stock has more than doubled from its IPO price of $21.
The success of Mobileye’s listing sets the stage for an initial public offering for Arm later this year. CEO Rene Haas told me last week that Arm is “fully committed” to going public in 2023. “Plans are in full swing,” he said.
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Trying to gauge the value of Arm is difficult. You can’t compare it to a traditional chip company because Arm doesn’t actually make or sell any components. Arm creates chip designs – Arm-based processors can be found in almost all mobile phones, for example. It’s not really a software company and not really a service provider. Comparisons are hard to find.
Arm generates revenue in two ways: by licensing new devices to its technology partners, and by paying royalties as devices are released. Haas notes that Arm isn’t immune to slow sales of PCs and mobile phones, but Arm’s results for the quarter were buffered by rising royalties. Arm continues to see strong growth in both the cloud and automotive end markets.
Overall, Arm had revenue of $746 million for the December quarter, up 28% year over year. Sales in March 2023 could be around $3 billion.
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In 2015, the last full year before Arm’s acquisition, the company had revenue of $1.5 billion, making SoftBank’s $32 billion acquisition price 21 times its revenue.
A similar multiple would mean a valuation in the $60 billion range; that seems expensive in the current environment. Use a valuation multiple similar to Mobileye’s, about 12 times sales, and you get $36 billion. As with Intel’s sale of Mobileye, SoftBank is a motivated seller that needs a big win. It can use the money to buy back stock and pay down debt. Arm’s IPO is imminent. Expect a public submission soon.
write to Eric J. Savitz at [email protected]
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