Shares of Arm Holdings (ARM 4.11%) were flying higher again today, just two sessions after the stock jumped nearly 50% on its earnings report last week.
There was no company-specific news in particular, but the broader sense of euphoria in the semiconductor and AI hardware sectors seemed to propel the stock higher, as it was trading on extraordinarily high volume. As of 12:47 p.m. ET, the stock was up 26.1%.
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Arm is the latest AI rock star
Arm's third-quarter earnings report made it clear that the company is joining the AI surge that has thus far lifted stocks like Nvidia and Super Micro Computer to multibagging returns.
The company's results didn't include blowout numbers, but they foreshadowed big wins to come in artificial intelligence. Arm is a close partner of Nvidia, and its highly efficient CPU chips hold additional value at a time when cloud infrastructure giants and start-ups are building out infrastructure to run the power-hungry, massive foundation models that make programs like ChatGPT work.
Management said that licensing revenue was better than expected in the fiscal third quarter, up 18% to $354 million, showing interest building for Arm CPUs as "companies increase investment in AI across all end markets."
CEO Rene Haas said:
More customers moving to higher-value Armv9 technology, combined with market share gains in cloud server and automotive, resulted in strong royalty growth. The AI wave drove licensing growth, as these new devices require Arm's performant and power-efficient compute platform.
Can Arm stock keep climbing?
With today's surprise breakout, Arm stock's valuation looks like it's getting ahead of itself, according to some metrics. For example, it trades at a price-to-sales ratio of close to 50 after today's surge, though the company is highly profitable, so the P/S ratio may not be the best way to value the stock.
Based on today's jump, investors seem to be betting that Wall Street estimates are significantly underestimating the company's future growth. That could be the case, as breakouts by Nvidia and Super Micro Computer show how powerful the demand for AI components is right now.
Arm is unlikely to experience the triple-digit revenue growth that Nvidia and Supermicro have, as much of its business is focused on smartphones, a slower-growth market, but AI demand could drive its bottom line significantly higher. This explains why the stock is up again today -- and why it could still keep gaining from here.
