Arm Is Vulnerable to GPU Kingpin Nvidia and More In Changing Semiconductor Landscape: Analyst

Needham analyst Charles Shi initiated coverage on ARM Holdings Plc ARM with a Hold rating.

Arm's architecture is the foundation of smartphones. The analyst sees the world as entering a post-smartphone era that will see high-performance computing and IoT lead the next phase of semiconductor growth. 

Shi attributed Arm's past success in smartphones to its tightly controlled ecosystem. In new growth areas, however, viable alternatives to Arm exist, and ecosystem control often resides in the hands of others. 

Arm can grow by capturing more excellent value from smartphones, but not enough to support the upside from the stock's IPO valuation. So, the analyst awaits a better entry point. 

The analyst credits Arm for building a robust smartphone ecosystem that fundamentally became its moat and gave Arm strong pricing power. However, just like Intel Corp INTC finds it difficult to replicate its success outside of PCs, Arm will face challenges outside of smartphones when high-performance computing replaces smartphones as the semiconductor industry's growth driver. 

Arm has not been able to replicate its smartphone success in IoT. Arm, under SoftBank, aggressively diversified away from smartphones by significantly increasing its exposure to IoT devices. 

Despite the new IoT emphasis, its contribution to Arm's royalty revenue is still below 10%.

Shi attributed the company's mixed financial performance over this period to challenges in monetizing IoT to the same degree as smartphones. 

Furthermore, he thinks it unlikely that these challenges go away, and high-performing computing may bring even more significant challenges. 

The next phase of semiconductor growth will be driven by high-performance computing (HPC), particularly in data centers. Generative AI is transforming data centers as GPU and AI accelerators take over CPUs and become the workhorses for computing. 

Despite Arm's notable successes in CPUs with Apple Inc AAPL, Amazon.Com Inc AMZN, Nvidia Corp NVDA, and Oracle Corp ORCL, the data center ecosystem is firmly in the hands of Nvidia on the GPU side, and Intel Corp INTC and Advanced Micro Devices, Inc AMD on the CPU side. 

At the same time, Arm faces a growing threat from the open-source RISC-V that is narrowing the gap with Arm in performance, power consumption, and total cost of ownership (TCO). 

Price Action: ARM shares traded lower by 1.57% at $62.56 on the last check Friday.