Arm’s chip adventure is bold bet on AI evolution

LONDON, March 30 (Reuters Breakingviews) - Arm is embarking on a new adventure. The $153 bln SoftBank-controlled group’s shares jumped 16% last Wednesday as it outlined a plan to sell AI processors, not just licensing designs for them, as it ​has hitherto done. CEO Rene Haas even expects, opens new tab to make some $15 billion in sales from the new business within five years. ‌It’s a bold bet on the future of AI.

Nvidia’s (NVDA.O), opens new tab flashy $30,000 graphics processing units (GPUs) have so far provided the core infrastructure for training large language models, as they excel at crunching vast datasets. But as artificial intelligence shifts toward inference - deploying those models for everyday uses, and even doing “agentic” tasks with minimal human oversight, AI systems will need a lot ​more of the standard chips typically used in smartphones and the like, known as central processing units (CPUs). These are better for managing ​data flows and coordinating tasks. Servers that once paired a handful of CPUs with dozens of GPUs may approach a ⁠one-to-two ratio, Deloitte reckons, opens new tab.

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Arm, which has historically licensed designs for semiconductors, therefore senses a big new opportunity. Instead of collecting its standard 5% royalty from ​tech giants like Nvidia and Amazon.com (AMZN.O), opens new tab, building the chips outright allows Arm to keep more of the revenue for itself. The company already has $1 billion in ​customer commitments for 2028 and expects that number to double annually through 2030. Ultimately, Haas expects CPUs to drive 60% of Arm’s revenue by the year ending March 2031.

Still, the challenges are formidable. The legacy CPU industry is dominated by two players, with Intel (INTC.O), opens new tab holding roughly 74% and Advanced Micro Devices (AMD.O), opens new tab 26%, making it hard for new entrants ​to crack. Arm’s bet hinges on AI agents drastically expanding the total addressable market, capturing new workloads where power efficiency is paramount. It claims its ​technology delivers twice the performance per watt than existing CPUs. But incumbents Intel and AMD possess massive R&D budgets, deeply rooted enterprise relationships, and may challenge Arm’s technological ‌advantage later.

Arm’s ⁠pivot may also pit it against its own chipmaker customers, and potentially Big Tech companies, like Amazon, who are starting to manufacture their own semiconductors. If its customers see Arm as a threat, they will explore alternatives to its designs, or haggle over pricing. That risk appears mitigated for the next few years: around 70% of the company’s projected royalty revenue is already locked under multi-year contracts through fiscal 2031.

Arm’s valuation reflects some of those challenges. Arm’s ​stock surged 16% last Wednesday, after ​it announced the new strategy, adding $23 ⁠billion in market value. Apply a multiple of four times sales, broadly in line with the average of chipmaking peers Nvidia, AMD, Intel, and Broadcom (AVGO.O), opens new tab for 2030, and the bump only bakes in an extra $6 billion of additional ​revenue, less than half of Arm’s $15 billion goal. Investors may be signalling Haas should dial back his optimism.

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CONTEXT ⁠NEWS

Arm on March 24 announced a new artificial intelligence data centre chip, which it said will add billions of dollars of revenue and represent a significant shift in the company’s strategy.

The new chip, called the AGI CPU, will address data-crunching needed for a specific type of AI that is able to act on behalf ⁠of users ​with minimal oversight, instead of responding to queries as part of a chatbot.

Shares of Arm ​soared 20% to their highest since November, as the British chip group expects the data-centre chip to generate roughly $15 billion in annual revenue in about five years.

Rivals Intel and Advanced Micro ​Devices also advanced more than 5% each.

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Editing by Neil Unmack; Production by Streisand Neto

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Karen Kwok

Thomson Reuters

Karen is a columnist focusing on global technology and venture capital sectors, writing stories about artificial intelligence, fintech, and semiconductor companies. She also covers deals in the Middle East region and global metal mining sector. Prior to Breakingviews, she was a European gas and power reporter at S&P Global Platts in London and covered funds and equities at Morningstar UK. Karen also briefly worked at Bloomberg. Born and raised in Hong Kong, she is fluent in Mandarin and Cantonese.

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