The founder of Japan’s Softbank (OTC: SFTBY), Masayoshi Son, is known for his big bets. Or what he calls big “crazy ideas.”
He put $20 million into China’s Alibaba Group (NYSE: BABA) before it became the powerhouse it is today. That investment is now worth $65 billion.
Son-san is not always right though. His investment into Sprint (NYSE: S) has been a loser.
And now he’s at it again. . . plunking down about $32.2 billion for the U.K. chip designer and IP owner, ARM Holdings (OTC: ARMH).
This bet by Son is a calculated gamble that the next big growth area in technology will be the Internet of Things (IoT).
ARM Is Well-Armed
For U.S. investors not familiar with ARM Holdings, its business model is rather simple.
The company licenses its technology – chip blueprints – to other technology companies such as Samsung Electronics and Apple (NASDAQ: AAPL). It then receives a small royalty for every device sold that uses its technology.
ARM’s revenues are comparatively small, though revenues did quadruple over the past decade. But its profit margin is very high and the envy of other chip companies.
ARM Holdings has grown to dominate the market for chips in mobile devices (in 95% of devices) completely outperforming Intel (NASDAQ: INTC).
In 2015, more than 15 billion small, low-power chips based on its technology were shipped. That was up three billion from the year before.
The momentum continued into the company’s latest quarter. ARM said 3.6 billion chips containing its technology were shipped in the second quarter of 2016. Royalties paid of these chips rose 19% – or 11% in dollar terms – in the quarter.
However, with the mobile phone market nearing a saturation point, the company is seeing much faster growth in its licenses technology for sectors like networking equipment and IoT. Alphabet (NASDAQ: GOOG), for example, is thinking about shifting its data centers from using Intel’s x86 chips to ones based on ARM’s technology.
Internet of Things
ARM’s technology will allow Softbank to participate in several high-growth tech sectors: the cloud, augmented and virtual reality for mobile devices and the Internet of Things. That’s the network of physical objects in our lives embedded with electronics, sensors, software and connectivity that will allow these objects to collect and exchange data.
And it will be big.
Research firm Gartner says that, by 2020, there will be 20.8 billion connected devices.
The Industrial Internet of Things
Pretty impressive number, right?
While most of Wall Street is focusing on the consumer Internet of Things, I believe the Industrial Internet of Things (IIoT) will be even bigger.
And so does Jeff Immelt of General Electric (NYSE: GE). Last autumn, he said “the industrial internet will be much bigger than the consumer internet.”
By 2020, revenues generated from the industrial IoT market will be about $225 billion, according to General Electric. In comparison, GE forecasts the consumer IoT will only generate about $170 billion by then.
The question for investors is: who will emerge as the big winners from the IIoT?
Winners in the Industrial Internet of Things
With the industrial internet of things focusing on software and big data, on a cursory exam, one would think technology companies have the upper hand.
Especially since the industrial software market will be a big part of IIoT. GE forecasts the software market alone will reach $100 billion in size by 2020.
But do not overlook the classic industrial companies such as GE and Honeywell International (NYSE: HON), which is also making a big push into IIoT.
Jeff Immelt says his company would be a “top 10 software company” by 2020.
There will likely be only a few winners in this space. Think smartphones – Apple and Google rule. Or cloud computing where Amazon and Microsoft are currently the two big players.
As Bill Ruh of GE said to the Financial Times, “It’s winner takes all. A cloud-based platform to connect machines and build applications into it and have global scale. . . you’re only going to have a few of those.”
Who will rule the industrial internet of things? It’s too early in this game to know.
So I can understand why Masayoshi San chose to buy ARM. It’s a calculated gamble that the company will come to dominate with chip designs in these revolutionary “smart” industrial devices much as it has with the mobile revolution.
No matter who the “ruler” is, ARM will likely be at the center of it all.