Today, the "Giant" IPO plan may shock the world! Will he eventually "rule the world"?

In the past two years, Son Masayoshi, who had suffered losses, has come back with great enthusiasm riding the wave of AI, or at least that's how he appears.

According to Bloomberg, ARM, the chip design company under SoftBank, is expected to submit its F-1 filing (prospectus) on Monday Eastern Time. The target valuation for this IPO is estimated to be between 60 to 70 billion dollars, with a planned fundraising amount of 8 to 10 billion dollars. It is expected to be the largest IPO in the global capital market this year.

With the submission of the prospectus, the market will have a glimpse into the operations and financial condition of ARM since its acquisition by SoftBank 7 years ago. However, as usual, the valuation target, IPO price, and the amount of funds raised will most likely not be disclosed. The Wall Street Journal reported that SoftBank plans to issue approximately 10% of ARM's shares in this IPO.

In addition, SoftBank recently bought back 25% of ARM's shares from its Vision Fund at a slightly higher valuation of over 64 billion dollars. This transaction doubled the Vision Fund's profit on ARM, reaching over 16 billion dollars.

This internal transaction may be aimed at appeasing the Middle Eastern LPs, such as the sovereign wealth funds of Saudi Arabia and the United Arab Emirates, who have been bearing the huge losses of the Vision Fund. It also means that Son Masayoshi has put everything on the line for ARM's listing - if ARM's valuation does not exceed 64 billion dollars when it goes public in September, SoftBank will bear the losses.

AI driving "exponential growth" for ARM?

Since the acquisition of this chip design company in 2016, Son Masayoshi has always regarded ARM as the "crown jewel" in SoftBank's investment portfolio. With the arrival of the AI boom, Son Masayoshi has become more enthusiastic about discussing ARM's potential in the field of AI, believing that ARM can achieve "exponential growth" with AI.

In June, at the SoftBank shareholders' meeting, Son Masayoshi announced with great fanfare that SoftBank would shift to "attack mode" and eventually "dominate the world." He told investors that "ARM is the center of a group of AI-related companies that can generate synergies," and "85% of SoftBank Group's assets are overseas AI-related companies."

He also said that during the past seven months when he was out of the public eye, he not only reflected on his investment strategy but also created hundreds of inventions using the AI chatbot ChatGPT. He believes that these inventions can be realized through ARM.

However, considering Son Masayoshi's history of making grand promises, his praise for ARM's prospects is not very trustworthy.

When SoftBank acquired ARM for $32 billion in 2016, Son Masayoshi claimed that the Internet of Things (IoT) would be the "greatest paradigm shift in human history" and that ARM-designed chips would be the technological foundation of the IoT. However, the concept of the IoT turned out to be short-lived and quickly forgotten by the market. Today, IoT-related revenue accounts for only a small portion of ARM's revenue. For AI, although AI applications do have a certain trend of certainty, ARM is not in the center of the AI boom as described by Masayoshi Son.

From the current market perspective, the core of AI hype still lies in the computing power and software sectors. At most, ARM can benefit from NVIDIA's success: NVIDIA GPUs are crucial for driving AI training in data centers, but GPUs need to work in conjunction with CPUs, and ARM happens to excel in designing energy-efficient CPUs. For example, NVIDIA's new generation data center superchip GH200 includes CPUs based on ARM architecture.

However, unlike NVIDIA's dominance in the GPU field, ARM faces numerous competitors in the CPU design field, such as IBM, Intel, and AMD, among others. Moreover, CPUs only play a supporting role in the data processing process.

Therefore, if NVIDIA is the gold digger in the AI frenzy, then ARM is one of the many suppliers of shovels, occupying a relatively marginal position in the entire industry chain. Last year, over 30 billion devices using ARM technology were shipped, with ARM earning only an average of 9 cents per device.

Considering that the chip industry is currently undergoing a period of valuation transformation, investors are trying to distinguish which companies will benefit from the highly anticipated AI boom and which companies will be eliminated. Therefore, it is not difficult to understand Masayoshi Son's efforts to ride the AI wave.

Will the revenue decline of $64 billion valuation be maintained on the eve of IPO?

ARM's main revenue stronghold is the mobile chips used in mobile devices, including tech giants such as Apple, Huawei HiSilicon, and Amazon, all of which use ARM's mobile chip design solutions.

Similarly, the downturn in the consumer electronics market has also dragged down ARM's revenue growth. According to the Financial Times, ARM's revenue declined by 11% YoY in the last quarter due to weak demand for smartphones.

What is more worrying is that ARM's largest customers, such as Apple and Qualcomm, are shifting towards self-developed CPU cores (i.e., chip basic components) and only using ARM architecture. The Financial Times reported that if they only purchase architecture licenses, these companies would pay half the amount of patent fees to ARM. As ARM heavily relies on a few major customers, the shift of customers towards self-developed cores will greatly impact the company's revenue.

In addition, ARM's IPO timing coincides with the most sluggish year for US IPOs since the financial crisis. So far this year, US IPOs have raised only $14.4 billion, and one-third of that amount comes from Kenvue, a consumer health division of Johnson & Johnson.

The challenging IPO prospects have prompted SoftBank to actively seek major investors to boost trader confidence. In the past few months, ARM's customers and partners, including Intel, NVIDIA, Amazon, Apple, and Samsung, have been rumored to be in talks with SoftBank to participate in ARM's IPO, but there has been no official announcement yet. SoftBank has learned a painful lesson from missing out on the hot trend of chip investments. Six years ago, SoftBank purchased $3 billion worth of shares in AI leader NVIDIA. If SoftBank had chosen to hold on to these shares instead of selling them for short-term profits, their value would now be $50 billion - possibly higher than the entire market value of ARM when it went public.