In the chip world, there are two architectures: one from Intel and the other from ARM. ARM is the basis for everything else, and it has a patent on its architecture that almost all companies pay royalties to. The Japanese investment fund Softbank owns about 90% of ARM shares and benefits from its success.
Last Thursday, ARM caught the attention of Wall Street with a 50% jump in one day and a 125% increase since it was issued less than six months ago, reaching a value of around 118 billion dollars. The recent increase was due to encouraging reports and good forecasts for the future thanks to strong demand from the field of artificial intelligence (AI). So, is ARM the new hot stock on Wall Street, or were investors blinded by AI and the increase was spotty?
ARM’s chips are used in various fields such as cellular (where it controls more than 99% of the market), vehicles (41% of the market), IoT (65%), and data centers (10%) for large computing power required for AI developments. Almost every major technology company makes use of ARM’s chip architecture, including Amazon, Google, Meta, Microsoft – and Nvidia itself.
In retrospect, Softbank should be happy about their failed deal to buy Nvidia in 2020 for 40 billion dollars compared to today’s value of over 100 billion dollars. Last week, ARM reported its results and exceeded analysts’ forecasts by reporting an adjusted profit of 29 cents per share in the last quarter compared to forecasted profits of 25 cents per share. Regarding next year’s revenue projections, Arm expects $3.16-3.205 billion while analysts expect $3.05 billion.
According to Nir Orgad at Bank Leumi, Arm has high hopes for its new V9 chip design architecture which may contribute twice as much in royalties compared to its previous generation chip design architecture. In fact, about 15% of Arm’s customers already used V9 in Q4 compared to Q3’s use rate by only 10%. However, Arm’s current pricing is one of the highest in the market: its earnings multiple stands at 78 while Nvidia’s is at only 34. Shahar Karmi at Psagot believes that if you want to play in AI race or buy shares in this field there are cheaper options like Nvidia or AMD with lower multipliers; he suggests looking into other options before investing solely in Arm.