Chapter 1: What recent developments are happening with Arm and its chip production?
The big news of the day of the week, this has been going on all week, is that Arm, the intellectual property developer that creates intellectual property designs for CPUs, is now getting into the chip game. And they got a big Arm pump in the stock market. So the company is up 15% over the last few days on the news that they will sell their own chips. This is new for Arm.
Arm's a very old company. Fascinating history. I actually made a 25-minute YouTube video all about the history of the company back in 2023. But we'll recap a little bit of it today. They normally just license out their intellectual property. And that is a phenomenal business. 97% gross margins. 97% gross margins. Yeah. Let's give it up. There we go. Let's give it up. That's amazing.
And, you know, it's a big business. $4 billion in revenue last year, nearly $800 million of net income. This new move, they're expecting to ramp revenue to $15 billion by 2031. So they're expanding the market significantly. Now margins will be different. But the market cap for Arm is now around $166 billion. So it's a big company. It trades at a very high multiple.
Yeah, $4 billion last year, currently trading at $165 billion.
But very, very high gross margin. This is a big shift in strategy. ARM's not an AI loser by any means, but it hasn't gotten the attention that other GPU makers have received, like NVIDIA. CPUs are far from dead, though. In fact, we are currently in what seems like a little bit of a CPU crunch. Intel can't make CPUs fast enough.
NVIDIA is starting to sell their Grace CPU that goes with their Hopper, so you get the and you pair it with the Grace CPU, you get the GPU and the CPU all on one system, well now you can buy the CPU by itself if you're CPU constrained. So you don't wanna just be GPU rich and CPU poor, you gotta be rich in both camps, and a lot of companies are jumping in to fill this gap.
Agents, and a lot of this is because of agents. Agents need CPUs, you need to fill the GPUs constantly with new data and tasks. Also, all of the agents use CPUs to make web queries, search the web, run Python, spin up web servers, interact with anything. Uptime is going down for non-GPU accelerated workloads.
Like you go to a SaaS product that is basically just a web server that's running on a CPU somewhere in a data center. And you're like, oh, this thing isn't loading today. Or like there's downtime.
And a lot of that's just because we're writing more software, we're using more software as a society, as a country, and we need more CPUs as well as GPUs, even though GPUs are like the hot thing to talk about. So Arm has a very interesting backstory, but you can think about it basically as a joint venture between three groups, Apple, Acorn Computer, and VLSI.
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Chapter 2: How is Arm's market strategy shifting towards direct chip sales?
Everyone is working on a PDA.
Yeah, personal super intelligence assistance. There's a whole bunch of things. We're building PDAs, folks. They just live in the cloud, and it's not a physical device. But these PDAs back in the 90s were physical devices. This was post-Pager, pre-smartphone, and it was the device that you carried take notes, and do things that you do today in apps, you would do on your PDA.
But it wasn't always on, internet connected, none of that. It was a pump out, and this was like a fantastic business for a while. But there were a lot of problems with this, because for the first time, you needed a CPU that could live within a plastic shell, basically. These were like plastic enclosures. You need to run a battery.
It needed to be able to do some things, not crazy compute, but the CPU industry in the 90s was very focused on mainframes, servers, desktops, there were a few laptops popping up, but it was not the mobile phone revolution that's happening now, where you have Apple silicon chips, and those are of course based on ARM architecture, but that's where all this came from.
People said, okay, we need a lower power chip that can actually run off a battery, not overheat and melt the plastic, do all of this, and it can be somebody It can power a device that you carry with you as a personal digital assistant, a PDA.
Chicken in the chat says PayPal started on PDAs. That's right.
That's right. So PayPal started originally, the idea was these PDAs had, they didn't have like tap to pay or anything like that, RFID. They had basically the same device that you'd see on a TV remote.
I are and it would flash a light that could be seen by another sensor and if you flash the light at a certain rate you can send a message you can basically it's like advanced what's what's that SOS thing Morse Morse code it's like a more advanced version of Morse code and so you could send a specific packet of information from PDA to PDA and this was the original idea for PayPal it's correct that's a great great
piece of lore, tech lore. Arm starts to build these. Later, there's Robin Saxby, who was the CEO of Arm at the time. He wanted Arm to become the global standard for CPUs, and so in the 90s, there were lots of different CPU makers, lots of different architectures. There's this whole CISC versus RISC debate. There's the x86 architecture that Intel pioneers.
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Chapter 3: How does the CPU market currently compare to the GPU market?
where a whole bunch of applications have needed to be rewritten for Apple Silicon, because previously you would have an Intel Mac before we got to the M1, M2, M3, M4, M5 chips. Those are Apple Silicon, those are ARM based. And sometimes you'll go to a website and it'll be like, oh, do you want to download this for a Mac? Like, what do you have?
Do you have an Intel Mac or do you have an Apple Silicon Mac? Well, it's important because when you write the software that runs on the Mac, you need to use specific instruction sets. Now there are ways to abstract that and run on either, but there are lots of pieces of software that interact with the CPU at a low enough level that they need to be aware of the instruction set.
So ARM sets out to be the global standard for CPUs, and they create the ISA, the Instruction Set Architecture, and that ultimately let Apple design their own chips, but within the architectural guidelines set forth by ARM. So Apple pays a license For two ARM, for every chip Apple sells, it's a very small license fee because Apple does a lot of design work.
They do the manufacturing, TSMC fabs it, and there's a million other pieces of the value chain. But for this one little slice, they have to pay ARM, and ARM just takes that and says, thanks, cool. You used our intellectual property successfully.
You know who else says thanks? Who? Masayoshi Son.
That's true.
Because they own 90%, roughly 90% of the company. It was a full buyout in 2016. That's right. They bought the entire company for something around $25, $30 billion USD. Buy the entire company. They still own 90% today. So their SoftBank's holdings, just in that one company, are somewhere in the range of... $140 billion when I was looking at. It's great.
It's the second time he's made $100 billion.
Well, and they've massively levered up against that position. They've raised debt against their holdings in ARM. But certainly, Masa is somewhere out in the world seeing it go up 15%, just smashing a gong.
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Chapter 4: What historical context is important for understanding Arm's evolution?
So they have been fairly specific, but trying to be very, very broad.
I was thinking I was fine with this. I was thinking I don't need any more AI data centers at this point. We can freeze those. I just want to build AGI data centers and ASI data centers. And so as long as I can just build tons of those, it should be fine. But it is interesting that they seem to have figured out the semantic loopholes that might happen if it's defined AI.
Yeah, the bill would halt all new data center construction and upgrades until more legislation is put in place to guarantee the following. And these will be tough to guarantee.
So from Sanders' site, they want AI to be safe and effective, preventing executives in the AI industry from releasing harmful products into the world that threaten the health and well-being of working families, our privacy and civil rights, and the future of humanity. The economic gains of AI and robotics will benefit workers, not just the wealthy owners of big tech.
And AI does not increase electricity or utility prices, harm communities, or destroy the environment.
So this stuff seems good.
Yeah, all generally good.
But no one wants unsafe and ineffective AI.
Well, yeah, and the bigger problem is any time you're creating. I don't think we've created a technology ever that didn't have Some negative impact. Car crashes, for example. I'm sure this will be rewritten and debated, and obviously it has a long way to go before becoming law. But this set of requirements seems completely impossible to actually achieve.
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