Shares of top semiconductor patent company and recent IPO stock Arm Holdings (ARM 2.96%) have gone wild during the most recent bout of AI hype. After the company released its latest quarterly earnings update on Feb. 7, the stock price nearly doubled in value in just a few days.
NASDAQ: ARM
Key Data Points
Management was liberal with its use of the term AI on the quarterly call, and perhaps for good reason. Arm's claim to fame is lending a big helping hand to Apple with designing cutting-edge mobile chips for the iPhone and the M-series chips for MacBooks. Lots of other companies would like similar-performing chips powering their own hardware.
Arm could be just getting started as a new bull market starts to heat up. But does that make the stock a buy?
A big boost to growth estimates
A new growth cycle is beginning for consumer electronics. The inventory of smartphone chips returned to healthy levels after an overhang of excess supply cropped up in late 2022. In the world of PCs (including Apple's MacBooks), a resumption in normal consumer buying behavior might be beginning after sales tumbled following the massive spending spree during the pandemic. And in the world of industrial connectivity, Arm-based chips are powering more equipment -- from autos to smart factory machinery to healthcare equipment.
With the list of Arm use cases only increasing in a new era of AI, the company felt comfortable boosting its financial estimates for the current fiscal year (which ends in March 2024).
|
Arm Holdings Metric |
Fiscal 2023 |
Previous Fiscal 2024 Estimate |
New Fiscal 2024 Estimate |
New Implied Growth YoY |
|---|---|---|---|---|
|
Revenue |
$2.679 billion |
$2.96 billion to $3.08 billion |
$3.155 billion to $3.205 billion |
19% |
|
Adjusted earnings per share (EPS) |
N/A* |
$1.00 to $1.10 |
$1.20 to $1.24 |
N/A |
*Arm Holdings was a wholly owned subsidiary of Softbank Group in fiscal 2023, and so did not report earnings per share. Data source: Arm Holdings.
Investors are pleased with the early progress since Arm's re-IPO in the autumn of 2023. None are likely happier than Softbank Group, which acquired Arm in 2016 for $32 billion. Softbank still owns over 90% of Arm after it sold some shares late last year. As of this writing, Arm now has a market cap of over $150 billion.
Is AI enough to send the stock even higher?
During its last update, Arm was quick to point out just how much of the semiconductor world its leading chip patents can still gobble up. It's already the dominant player in smartphones with a near-monopoly, and now it's gunning for new markets like cloud computing and data centers -- a market that Intel's processors held sway over for decades.
Data source: Arm Holdings.
Again, the company cites AI as the reason for optimism, as advanced computing processes absolutely devour energy. But Arm chips are efficient, and designing them into power-hungry data center infrastructure could help cut down on future operating costs (like power consumption).
There's reason to believe Arm could be entering a new phase of growth over the next few years, in excess of what investors were originally told to expect even just a few months ago.
But as before, my hang-up is the wild valuation after the stock has rocketed higher. Arm stock trades for nearly 85 times earnings per share on a one-year forward basis using Wall Street analysts' expectations.
One reason shares may have blasted higher, in spite of a rich valuation, is that Softbank owns so much of the stock. With too few shares in supply and high investor demand, the price goes up. The lockup period, after which Softbank could sell more Arm stock, ends on March 12, 2024 (six months after the IPO). That's a date to keep a close eye on, as rising supply could suddenly cause that stock price to reverse some of its gains.
Given the recent stock price action, I'm still sitting on my hands. But Arm is right -- AI is just the next pillar of growth for this business. It's worth keeping tabs on at the very least, even if it may not be a timely semiconductor stock buy in my book right now.
