# 015 Exclusive - How SoftBank’s Arm (Chip Designer) Failed to Live Up to Its Destiny?
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AI BYTE 📢 : How SoftBank’s Arm (Chip Designer) Failed to Live Up to Its Destiny?
Arm, the chip designer that powers most of the world’s smartphones, is going public this month in what is expected to be the largest initial public offering of the year.
But the company’s performance under the ownership of SoftBank, the Japanese technology conglomerate, has been disappointing.
Arm has fallen short of its ambitious growth targets, failed to capitalize on the Internet of Things hype, and faced increasing competition from rivals.
In this post, we will examine how SoftBank’s Arm failed to live up to its destiny and what challenges it faces in the future.
The Deal That Was Meant to Be
SoftBank acquired Arm in 2016 for $32 billion, a 43% premium over its market value at the time. The deal was driven by SoftBank’s founder and CEO, Masayoshi Son, who saw Arm as a strategic asset for his vision of creating “happiness for everyone” through technology.
Son was so excited about the deal that he said it was “very much my destiny” after decades of tech investing.
Son predicted that Arm would grow by five times in five years, driven by the explosion of devices connected to the internet, such as smart cars, refrigerators, and doorbells.
He also envisioned that Arm would expand its market share in other areas, such as servers and artificial intelligence. To achieve these goals, Son ordered a dramatic increase in hiring and research and development spending at Arm.
The Reality That Fell Short
Arm’s reality, however, fell short of Son’s expectations. While Arm remained a leading designer of components for chips used in smartphones, computers and cars, it had little more room to grow in its main business.
Its revenue increased by 65% since 2016, slightly ahead of the broader chip sector but well behind sector leaders.
Its profit margins declined from 34% to 20%, as the higher R&D spending did not translate into higher profits.
Arm’s bet on the Internet of Things also failed to pay off. The company spent heavily to build a cloud-based business where companies could feed device data onto a SoftBank-run platform.
However the market for IoT devices did not grow as fast as expected, and Arm faced competition from other players. Arm eventually moved away from the IoT sector and transferred its IoT subsidiaries to SoftBank.
Arm also struggled to break into new markets, such as servers and AI. In servers, Arm had a modest 10% market share, half of its target for 2021.
In AI, Arm faced fierce competition from Nvidia and other companies that specialized in chips for AI applications. While Arm claimed that it would benefit from the growth of AI-enabled systems, such as self-driving cars, it had yet to prove its competitive edge.
The IPO That Will Test the Market
Arm is now eyeing a target valuation between $50 billion and $55 billion for its IPO, according to people familiar with the matter.
Some analysts estimate Arm’s worth at between $45 billion and $50 billion, while SoftBank recently valued Arm at $64 billion when it bought out a stake held by its own SoftBank Vision Fund.
An IPO at the Vision Fund price would double SoftBank’s original valuation—and that would require investors to be particularly bullish on Arm compared with other chip stocks, given its comparatively modest revenue and profit growth in recent years.
The market’s verdict on Arm and its years under SoftBank’s custody will depend on two key factors: China and AI.
China accounted for nearly one-quarter of Arm’s revenue last year, but also posed significant economic and political risks.
Arm also relied on its affiliate Arm China for sales, which was embroiled in a corporate dispute last year. AI, on the other hand, offered a potential growth opportunity for Arm, but also required it to fend off competition from more established players.
Arm’s IPO will be a reality check for SoftBank’s vision and a test of its destiny.
Will Arm live up to its potential or fall behind its rivals? Will it justify its hefty price tag or disappoint its investors?
Only time will tell.