Arm Holdings, a semiconductor manufacturer and currently a top-performing stock on Wall Street, is capitalizing on rumors of an imminent AI boom, leading to a remarkable surge in its stock value.
After surpassing its earnings projections last week, investors have significantly boosted the British chipmaker’s stock price. The stock skyrocketed by 50% on Friday and an additional 30% on Monday, peaking at \(149, surpassing its pre-earnings value of \)74.
Recent studies indicate that Arm is being dubbed as the “next Nvidia” and is expected to profit substantially from its expanding AI division. Nonetheless, skepticism persists among industry insiders regarding the hype surrounding Arm. They argue that the company’s fundamentals and the absence of proven AI profits do not justify the surge, attributing it more to stock-specific trading dynamics and unverified AI buzz.
Charles Shi, an analyst at Needham and Co., expressed his confusion, stating, “I am puzzled by the current situation.” He believes that the factors propelling the stock price do not align with its true value. The soaring prices have raised concerns, surpassing even the most esteemed silicon companies in the industry.
Founded in 1990 in Cambridge, England, Arm Holdings specializes in designing semiconductor chips, competing with industry giants like Nvidia and Advanced Micro Devices. Its chips are integrated by tech behemoths such as Apple, Samsung, and Qualcomm in various products spanning from computers and smartphones to automobiles, with a recent emphasis on AI, as indicated in its latest earnings report.
Despite its recent IPO just five months ago, Arm exceeded expectations with $85 million in revenue last quarter, with its AI division attracting significant attention.
During an investor call, Arm CEO Rene Haas underscored the company’s robust momentum in the AI sector, stressing the importance of energy-efficient computing components to propel AI growth.
However, Arm’s substantial revenue growth primarily stemmed from royalties and licensing agreements rather than AI-related profits.
The majority of Arm’s revenue originates from fees paid by manufacturers integrating its chips in their products. The company reported a noteworthy revenue surge from its China division in the subsequent quarter, with a significant portion of the revenue derived from undisclosed licensing agreements signed the previous year.
Analysts advise against premature conclusions despite the stock’s surge, highlighting the uncertainty surrounding Arm’s AI prospects for chip licensing.
The peculiar trading patterns of Arm, with 90% of shares owned by Masayoshi Son’s SoftBank, contribute to the stock’s volatility. The limited availability of tradable shares, with only 10% actively traded at any given time, amplifies the stock’s susceptibility to fluctuations.
Shi highlighted the high trading volume, suggesting that short positions and retail investors might be influencing the stock price. The market’s small size renders it vulnerable to abrupt shifts, with potential ramifications if SoftBank opts to sell its shares.
Short positions could also impact the stock’s performance, as evidenced by the aftermath of Arm missing its previous earnings announcement. Buyers who bet against the stock might have been compelled to cover their positions following the unexpected surge, further boosting the share price temporarily.
As Shi aptly summarized, the situation remains dynamic as market forces continue to mold Arm’s stock performance.
