Tech Newsround – Arm & China Metaverse

SoftBank – Arm IPO.

• Arm China is holding up the relisting of Arm and the less-than-ideal solution that SoftBank is proposing highlights again my view that SoftBank may be better off holding onto Arm and relisting it another day.
• The situation between Arm and Arm China remains unresolved which has meant that Arm is unable to audit Arm China which in turn is holding up the IPO.
• SoftBank’s solution is to move the shares into one of its subsidiaries and create a series of contracts (very much like the Chinese variable interest entity) that will mimic ownership.
• That way, the IPO can go ahead without the audit of Arm China but I think this increases risks for investors.
• Around 20% of Arm’s revenues come from Arm China (in which it owns 47.3%) which with this solution will mean that these revenues come from a black box.
• The whole point of an audit is so that shareholders can accurately assess the prospects and risks of an investment and this solution will reduce that visibility.
• Hence, I think that this increases the risks of investing in the IPO meaning a higher discount rate and a lower present value.
• This combined with the fact that Arm’s IPO is unlikely to fetch the same valuation that SoftBank would have achieved from Nvidia raises the possibility that the shareholders of SoftBank might be better off if the IPO is delayed for a few years.
• This would give Arm more time to return to the levels of profitability that it enjoyed before SoftBank acquired the company and the large investment cycle began.
• This would allow a better valuation to be achieved and a better return to be earned by SoftBank’s shareholders.
• Warren Buffet famously once said “the stock market is a device that transfers money from the impatient to the patient”, which I suspect is relevant here.

Alibaba & nReal – There can be only two.

• RFM research has concluded that there can only be one Metaverse if it is to be successful, but it increasingly looks like there will be one for China and another one for everyone else.
• The big Chinese ecosystems Alibaba and Tencent have yet to make their move into the Metaverse but Alibaba’s investment into nReal is the first concrete sign of where it is going to go.
• Alibaba is investing $60m into nReal at a valuation that I suspect is comfortably above $1bn.
• nReal is a maker of augmented reality glasses that has routinely surprised me in terms of the user experience that it is able to produce and the price point that it charges for its products.
• nReal’s products are good enough that Magic Leap felt that it had to sue nReal for patent infringement, but the case ended up being thrown out.
• Hence, nReal is one of the leading contenders to create the Chinese metaverse which increasingly looks like it will be isolated from everywhere else.
• The strategic rivalry between the USA and China has become an ideological struggle meaning that both countries are continuing to decouple from each other.
• Nowhere is this more evident than in technology and this is likely to mean that interoperability efforts will be limited to a Chinese metaverse for Chinese users in China and another one for everyone else.
• This is bad news for everybody because a balkanisation of the Internet will mean that it will create much less value than it otherwise would have done had it remained whole.
• I think that the same is true for other technologies like AI, robotics, 6G and so on which are also likely to end up with one standard for China and another for everyone else.
• This means less value creation from the Metaverse and therefore a lower return from investing in the companies that will create it.
• The Metaverse remains pretty uninvestable in my view because its reality is so far away that investing in the companies that are in pole position to create it today is an investment in their current businesses, not the metaverse.
• For example, if one buys Meta, one is investing in social networking and not the Metaverse and Unity is an investment in the video games industry.
• Hence investors have to like the shorter-term businesses as well as their prospects in the Metaverse in order to buy the shares.
• Fortunately, this is the case with Alibaba which trades at a tiny fraction of Amazon and where the case for a recovery is steadily improving.