Last week, a British chip company caught the attention of Wall Street: Arm Holdings. In just one day, its stock jumped about 50%, and since its IPO six months ago, it has increased by 125% to a value of approximately 118 billion dollars. The reason for the recent surge in value was encouraging reports and strong forecasts for the future thanks to growing demand from the field of artificial intelligence (AI). So is Arm Holdings the new hot stock on Wall Street? Or were investors blinded by AI hype and the increase was simply too short-lived?
To understand Arm Holdings’ success, it’s important to first understand what it does. As Sergey Vaschunok, a senior analyst at Oppenheimer Investment House explains, “in the chip world there are two architectures – Intel and Arm. Intel is used in home computers, while Arm is used in everything else.” The Japanese investment fund Softbank owns about 90% of Arm Holdings shares and benefits from this arrangement.
Arm Holdings’ chips are used in various industries such as cellular, where it controls over 99% of the market, vehicles (41%), IOT (the Internet of Things such as smart homes), and data centers (where they provide large computing power for AI developments). Many major technology companies use Arm Holdings’ chip architecture including Amazon, Google, Meta, Microsoft – and Nvidia itself.
In fact, Nvidia attempted to purchase Arm Holdings from Softbank in 2020 for $40 billion but was blocked by British and American regulators. Today, Arm Holdings’ stock price is worth more than $100 billion after exceeding analysts’ forecasts last week with an adjusted profit of $0.29 per share compared to $0.25 predicted. They also reported revenues of $824 million compared to expectations of $760 million.
Looking ahead to next year, Arm Holdings expects revenue between $3.16-3.2 billion while analysts predict $3.05 billion – suggesting room for growth in this sector despite some skepticism expressed by some investors who believe that other companies like Nvidia or AMD may be better options at lower prices with earnings multiples standing at 78 for Arm compared to Nvidia’s 34 or AMD’s 32 or Intel’s only 19 respectively which could make sense if we consider their revenue potential with nearly $5 billion expected next year with almost 100% gross profitability according to Weschunok from Oppenheimer