Recently, a British chip company has caught the attention of Wall Street: Arm Holdings. In just one day, its stock price jumped about 50%, and it has increased by 125% since its initial issuance less than six months ago, reaching a value of approximately 118 billion dollars. The reason for this sudden surge was due to encouraging reports and strong forecasts for the future, thanks to the growing demand from the field of artificial intelligence (AI). So is Arm the new hot stock on Wall Street? Or were investors blinded by the hype surrounding AI and this increase was merely speculative?
Firstly, let’s take a look at what Arm does. According to Sergey Vaschunok, a senior analyst at Oppenheimer Investment House, there are two architectures in the chip world: Intel’s and Arm’s. While Intel is used in home computers, Arm is used in various other fields such as cellular (where it controls more than 99% of the market), vehicles (41% of the market), IoT (the Internet of Things such as smart homes, etc., where it controls 65%), and data centers (the large data centers that provide computing power for AI developments). Many major technology companies use Arm’s chip architecture, including Amazon, Google, Meta, Microsoft – and Nvidia itself.
In fact, Nvidia tried to purchase Arm from Softbank for 40 billion dollars in 2020 but was blocked by British and American regulators. Today, Softbank owns about 90% of arm shares and benefits from all its royalties. However, Softbank should be happy about the deal falling through since its holding is worth more than 100 billion dollars today.
Last week, Arm reported its results and exceeded analysts’ forecasts significantly. It reported an adjusted profit of 29 cents per share in the last quarter compared to analysts’ predictions of 25 cents per share and revenues of $824 million compared to expectations of $760 million. For next year, the company expects revenue between $3.16-3.205 billion while analysts expect it to bring in $3.05 billion.
The recent increase in arm’s share price could be seen as a sign of pessimism in the company if there are fewer investors who recommend buying it now compared to three months ago when there were more investors recommending buying it due to optimism on Wall Street Journal survey with fewer analyst recommendations today with only 16 instead of 19 previously recommended buying stock which could mean that current pricing may not be attractive enough anymore or too sharp jump which made current price unattractive for some investors or perhaps too high multiplier should be lower if company reaches $5 billion revenue with gross profitability almost at $1