The most interesting part of Arm’s public offering prospectus is, as is often the case, its ‘risk factors’ section. In 59 pages, it teaches the reader about the unique elements of Arm’s remarkable business, while at the same time covering the sweeping risks to the wider semiconductor industry.
There is a lot to learn from it. The risks include Arm’s exposure to China, its over-reliance on a few consumer electronics customers, losing control of its IP, its limited ability in artificial intelligence (AI), competition from open-source designs and the growing threat of war over Taiwan. This broad range of risks might make Arm sound uninvestable. However, most of them apply to semiconductor companies across the world, and like most of those companies, Arm’s ability to generate and maintain a high valuation might ultimately depend on its AI prospects.
In some ways, Arm is a unique business. Rather than designing its own semiconductors, like competitors AMD (US:AMD) and Intel (US:INTC), it designs architecture which it then licenses to customers. This doesn’t sound like a big difference, but it did land Arm the most important contract in its history, one that has defined the business for the past decade.