Shares of the central processing unit (CPU) architecture licensing company Arm Holdings (ARM +0.74%) were on the rise Wednesday, up 10.7% at one point before settling into a more modest 5.3% gain on the day. Today's gain built on a strong week after Arm was initiated with an "Outperform" rating by Wells Fargo analysts on Monday and a price target of $70.
That enthusiasm was then bolstered today by last night's Nvidia (NVDA +2.63%) conference call in which Nvidia's management had positive things to say about its own Arm-based CPU chip called Grace.
NASDAQ: ARM
Key Data Points
Nvidia is bullish on Grace-Hopper
In last night's conference call with analysts, Nvidia management was very bullish on its Arm-based CPU chips called Grace. The company noted the third quarter, in which Nvidia beat revenue expectations by over $2 billion, was the first in which it received any revenue from its Grace-Hopper super chip. Grace-Hopper incorporates the Hopper H100 graphics processing units (GPUs) with Grace, its Arm-based CPU chip. Management noted Grace-Hopper was "ramping into a new multibillion-dollar product line."
CEO Jen-Hsun Huang went on to say:
Grace Hopper is in production in high-volume production now. We're expecting next year just with all of the design wins that we have in high-performance computing and AI, AI infrastructures. We are on a very, very fast ramp with our first data center CPU to a multibillion-dollar product line. This is going to be a very large product line for us. The capability of Grace Hopper is really quite spectacular. It has the ability to create compute nodes that simultaneously have very fast memory as well as very large memory.
That was likely the reason behind Arm's move today, as there wasn't really any other material news for this chip licensing company.
Arm's architecture seems destined for growth over the next several years, as Nvidia is beginning to use the architecture for data center CPUs in an ongoing challenge to the x86 architecture owned mostly by Intel (INTC +7.53%). In addition, there were recent reports that more and more PC chipmakers, Nvidia included, are now working on more Arm-based chips for Windows-based PCs.
In general, the Arm architecture is generally known for its superior power efficiency, and x86 has traditionally been associated with more horsepower. However, it appears innovation on both architectures is happening at a fast clip, and the distinctions are starting to blur. It's very positive that Nvidia deems Arm worthy of including in its most computer-intensive AI applications, and the potential of "AI PCs" in the future is also potentially bullish for Arm's growth in the years ahead.
Arm is gaining share, but it's an expensive stock
There's no doubt that Arm is seeing more and more adoption versus x86; however, whether its stock price is justified is another matter. The stock currently trades at over 55 times next year's earnings estimates. That's actually substantially higher than Nvidia -- in fact, it's nearly double Nvidia's forward multiple!
Even though Nvidia is adopting Arm for its Grace CPU chips, Arm isn't a part of Nvidia's core GPU products, and those GPUs account for the vast majority of Nvidia's eye-popping revenue numbers. So, while Arm is definitely an interesting asset-light growth company, it's still a very expensive stock. That's especially true when other top-notch semiconductor players like Nvidia and others have much lower valuation multiples.
