Arm, a British chip company, has caught the attention of Wall Street in recent days. On Thursday, its share price jumped about 50% in one day and completed a jump of 125% since it was issued less than six months ago, to a value of about 118 billion dollars. The reason for the recent increase was encouraging reports and especially good forecasts for the future thanks to strong demand from the field of artificial intelligence. So is arm the new hot stock on Wall Street? Or were the investors blinded by the artificial intelligence and the increase was spotty?
In the chip world, there are two architectures: Intel and Arm. Arm’s architecture is used by almost all companies in the industry, including Softbank, which owns about 90% of its shares. The company’s chips are used in fields such as cellular (where it controls more than 99% of the market), vehicles (41% of the market according to its presentation), IOT (the Internet of Things such as a smart home, etc., where it controls 65% of the market) and data centers (the large data centers that are supposed to provide large computing power required for AI developments). In fact, almost every major technology company makes use of Arm’s chip architecture including Amazon, Google, Meta, Microsoft – and Nvidia itself.
Last week, ARM reported its results and significantly exceeded analysts’ forecasts. It reported an adjusted profit of 29 cents per share in the last quarter compared to 25 in forecasts and revenues of $824 million compared to expectations of $760 million. For next year’s revenue projections, ARM expects $3.16-3.205 billion while analysts expect it to bring in $3.05 billion.
The company has high hopes for its new V9 chip design architecture which may contribute twice as much in royalties compared to its previous generation chip design architecture. In fact, already last quarter about 15% of its customers had used V9 – an increase compared to 10% in the previous quarter. However, if three months ago 19 analysts recommended buying arm’s stock based on Wall Street Journal survey recommendations today this figure has dropped to only 16 analysts who recommend buying it now suggests that maybe that sharp jump was too sharp or simply not attractive enough anymore at current prices.
If you want to play in AI race and buy shares in this field then other companies like Nvidia or AMD could be cheaper options with earnings multiples standing at respectively 34 and