Shares of Arm Holdings (ARM -1.68%) climbed sharply higher this week, surging as much as 16.7%, according to data provided by S&P Global Market Intelligence. When the market closed after a short session on Friday, the stock was still up 16.2%.
There were a couple of catalysts that drove the stock higher this week, including robust results by another semiconductor specialist, as well as bullish commentary from a Wall Street analyst.
Nvidia provided the initial push
Earlier this week, Nvidia (NVDA -2.69%) reported the results of its fiscal 2024 third quarter (ended Oct. 29.), and its performance confirmed the accelerating demand for processors used for artificial intelligence (AI). The company generated record revenue of $18.1 billion, an increase of 206% year over year and well ahead of management's forecast of $16 billion. The bottom line was equally eye-catching, as diluted earnings per share (EPS) of $3.71 soared 1,274%.
Both figures were well ahead of expectations, as analysts' consensus estimates were calling for revenue of $16 billion and EPS of $3.36. So, what does this have to do with Arm Holdings?
On the earnings call, Nvidia CEO Jensen Huang noted that this was the first quarter that included sales of the GH200 Grace Hopper super chip, "which combines our ARM-based Grace GPU with a Hopper GPU. Grace and Grace Hopper are ramping into a new multibillion-dollar product line." Since Nvidia pays Arm a licensing fee for each of these chips sold, the results bode well for Arm in the future.
Wall Street is remarkably bullish
Wall Street is incredibly bullish on Arm's prospects. Of the 23 analysts who issued an opinion in October, 15 rate the stock a buy or strong buy, and just one recommends selling. Wells Fargo joined the bullish crowd this week, initiating coverage with an overweight (buy) rating and assigning a $70 price target. Even after the stock's strong move this week, it represents additional upside of 13% compared to Wednesday's closing price.
I'd be remiss if I didn't address the elephant in the room, namely Arm's valuation. The stock is currently selling for 61 times forward earnings and 18 times forward sales. While the opportunity represented by AI is vast, Arm has yet to deliver growth commensurate with that opportunity.
Until it does, I recommend keeping Arm stock as a small part of a balanced portfolio.