Artificial intelligence (AI) is transforming the way many businesses operate. Agentic AI, in particular, is an exciting opportunity as it involves multi-step processes, resulting in significant savings and efficiencies for companies.
One tech company that sees some exciting growth opportunities due to agentic AI is Arm Holdings (ARM +3.10%). The business recently announced an extremely bullish outlook that could make the tech stock a much hotter buy in both the short and long term.
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Arm has a new chip that could generate billions for the business
Arm CEO Rene Haas recently unveiled a new chip, AGI CPU, which is designed for AI inference. CPUs have been in greater demand due to the growing popularity of agentic AI, as they help manage multi-step processes, whereas GPUs are in greater demand when developing and training AI models. At a more mature stage, there's a greater need for CPUs, which is why Arm's new chip may be in high demand.
Haas projects that the demand is so significant that the chip's annual sales may top $15 billion by 2031, and that may even prove to be low. "We may be under-calling that number." But even at that seemingly modest figure, the company's revenue in five years could top $25 billion. That's a steep increase from the $4.7 billion it has generated over the trailing 12 months.
NASDAQ: ARM
Key Data Points
Is Arm's stock too expensive to buy right now?
Shares of Arm are up 34% this year, and the stock currently trades at around 200 times its trailing earnings. That's a steep multiple by any standard. Even based on analyst projections, its forward price-to-earnings multiple is high at 73. The danger with investing in a stock that is priced so high is that expectations are sky-high, and it's effectively priced for perfection; there's no margin of safety with the stock, and its future returns may be limited. With a market cap of around $160 billion, Arm's valuation is rich given its revenue, suggesting much of its future growth is already priced in.
As exciting a growth story as Arm's new chip may prove to be, I wouldn't buy the stock today given its enormous valuation. At a time when the market has been turning bearish on many other solid growth stocks, there are better deals to consider right now than Arm. While this may be a good stock to watch and track, it may not be the best one to buy today, and it may be due for a pullback in the near future.
