Sunday, March 31, 2024

"Arm CEO Sees a ‘Huge Tailwind’ From New Chips. Nvidia and Intel Are Helping Too." (ARM)

From Barron's, March 13:

Arm’s stock has soared since last year’s IPO. Why CEO Rene Haas is so confident about the company’s growth.

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Model Shift. Hi everyone. Arm Holdings makes money by licensing its chip designs to semiconductor companies and hardware makers. For decades, skeptics have questioned the value of the firm’s technology; its designs often made only cents per chip.

Times have changed. Last month, Arm blew away Wall Street expectations for its December quarter, while offering an outlook that was far above the Wall Street consensus. The main drivers were a shift to higher royalty rates and gains in the cloud server market. “The AI wave drove licensing growth as these new devices require Arm’s performant and power-efficient compute platform,” CEO Rene Haas wrote in a letter to investors.

Arm’s latest advanced chip technology, called Armv9, generates double the royalty rates of its previous Armv8 products. For some high-end processors, which combine more than 100 “cores,” Arm’s designs are now pulling in more than $100 per chip. It’s a massive change from prior generations.

Cloud server chips based on Arm technology also benefit from the rapid growth in AI with Nvidia using Arm for its GH200 AI Superchip data center systems. A GH200 Superchip can have up to 144 CPU cores and Arm gets paid for each one.

I recently spoke to Haas about company’s progress in the cloud server market, the company’s business model shift, and its partnerships with Nvidia and Intel . The CEO sounded incredibly confident about the company’s outlook.

Arm’s stock has been a stellar performer, recently trading at $131, more than 150% above its September IPO price of $51.

The question for investors now is whether the company’s recent financial performance is sustainable.

I, for one, am bullish. Arm’s customers have been willing to pay the higher royalty rates, meaning the boost from Armv9 is likely in the early stages. Further, Arm-based cloud server chips from Amazon Web Services, Microsoft ,

Nvidia, and others will likely generate robust revenue for years.

Outside of Nvidia, Arm may be the best fundamental growth story in technology.

Here are edited highlights from my conversation with Haas:

Barron’s: Can you talk about Arm’s opportunities in the cloud server data center market. It looks like this business is starting to take off.

When we were privatized, we had an opportunity to look at what to do with our investment dollars. With data centers, we noticed several things that we could do. If you want to put together processors, we were lacking a fabric [to weave the network together]. We were lacking certain extension instructions. So we designed CPUs with the right power profile, features, and performance.

Then there was a bunch of work that needed to happen in the software ecosystem. The magic moment came when Red Hat announced their Linux distribution for Arm servers. It all came together.

Amazon  saw it very early. Roughly half of Amazon’s AWS server additions are now Arm-based.

We also changed our business model. In the past, it would have been crazy to think Arm would someday get paid $100 for each SoC [system- on-a-chip]. But that is what we are getting after we priced at 50 cents to $1 per core. If you put in 100 cores, we are getting north of $100 on these SoCs.

What kind of demand are you seeing for the Nvidia GH200 Grace Hopper AI systems? In the last earnings report, you noted how the GH200 will run some of the most demanding AI applications in the world today.

It’s very, very strong. Nvidia is pushing it very hard. What Nvidia has done with Grace Hopper is essentially taken 72 to 144 Arm CPU cores, and bolted it to an H100. It replaces the x86 implementation. Nvidia has also done all the CUDA driver work for Arm-based CPUs. It’s great for us that Nvidia is shipping it.

What’s the impact to the business going from Armv8 to Armv9? I saw that Armv9 accounted for 15% of royalty revenue in the December quarter from 10% the prior quarter. Is that pace going to keep up?

It is. A couple of things to keep in mind on v8 to v9. We’re going to see very, very fast adoption with v9. Everything that we do in servers is v9. It’s more power efficient and has a huge amount of security features....


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