Arm Shoulders More of the Supply Chain by Making a Chip

Arm’s stock flexed more than 16% on Wednesday after the chip designer decided to take chip-making into its own hands. The 35-year-old company previously made money mostly by licensing its designs to other players in the chip ecosystem, including Qualcomm and Nvidia, and then scooping up royalties from their sales. Now, Arm wants to make its own chip built to support agentic AI. 

Arm already has its first customer queued up: Meta, which is collaborating with Arm to help develop the new “AGI CPU” (Artificial General Intelligence Central Processing Unit). OpenAI and Cerebras also plan to use Arm’s new chip, Arm said. 

SoftBank, which bought Arm in 2016 for $32 billion, saw its shares jump about 8% in Tokyo yesterday. Arm is among SoftBank’s many big bets on AI companies.

35, Flirty, and Thriving

Demand has surged for chips that can support agentic AI, the kind of AI that acts as a personal assistant by automatically reading and responding to emails, buying weekly groceries and so on. Making a chip that can meet that demand is Arm’s latest move to boost profits as the tech sector shifts its focus to AI:

• Arm’s current CEO, Rene Haas, took the helm four years ago and has switched the company’s focus from smartphone chips to data center semiconductors, which sell at significantly higher prices. The transition to chip-making, rather than relying on licensing intellectual property, is also a play for money. Haas expects the new chip to generate about $15 billion in annual revenue within five years, accounting for the bulk of its anticipated $25 billion in total sales. The rest is expected to come from its still-growing (but not as much) IP business. 
• Under Haas, Arm’s revenue has surged more than 20% a year, with annual sales breaking past $4 billion last year. Arm’s gross margin last quarter was a super-high 98%, but making its own CPUs is expected to bring it closer to its peers’ levels.

More is Merrier: Powering AI requires tapping millions of high-end chips of different kinds that work together. Arm’s new chip is made to work with Nvidia chips. And while Arm said its chip is more power-efficient than rival tech from Intel and AMD, booming demand could mean there’s room for multiple competitors making similar chips. Shares in Arm’s soon-to-be rivals, Intel and AMD, climbed about 5% and 6%, respectively, yesterday.