Arm’s post-earnings pop leaves stock trading at over 100% premium to Nvidia

Exactly
two
years
ago,


Nvidia’s
attempt
to
purchase
chip
designer

Arm
from
SoftBank

came
to
an
end
due
to
“significant
regulatory
challenges.”

Masayoshi
Son,
SoftBank’s
billionaire
founder,
has
never
been
so
lucky.

That
agreement
would
have
involved
selling
Arm
for
$40
billion,
or
just
$8
billion
more
than
SoftBank

paid
in
2016.
Instead,
Arm

went
public
last
year,
and
the
company
is
now
worth
over
$116
billion
after
the
stock
soared
48%
on
Thursday.

SoftBank
still
owns
roughly
90%
of
the
outstanding
stock,
meaning
its
stake
in
Arm
increased
by
over
$34
billion
in
a
day.

But
the
rally
is
somewhat
confounding
when
looking
at
how
the
market
values
Arm.
Wall
Street
may
start
to
get
a
clearer
sense
of
how
much
investors
are
willing
to
pay
next
month,
when
the
180-day
lockup
period
expires
and
SoftBank
will
have
its
first
opportunity
to
sell.

Chipmakers
Nvidia
and


AMD
have
been
Wall
Street
darlings
of
late
due
to
their
central
position
in
the
artificial
intelligence
boom.
Nvidia
makes
the
bulk
of
the
processors
used
for
cutting-edge
AI
models
like
those
that
power
ChatGPT,
while
large
tech
companies
have
also
indicated
their
interest
in
purchasing
competitive
chips
from
AMD
as
they
hit
the
market.

But
Arm
is
now
being
valued
at
a
much
higher
earnings
multiple
than
either
of
those
companies.
As
of
Thursday’s
close,
investors
are
valuing
Arm
at
close
to
90
times
forward
earnings.
That
compares
to
a
forward
price-to-earnings
ratio
of
33
for
Nvidia
and
46
for
AMD,
which
both
have
significantly
higher
multiples
than
other
major
chip
stocks
like


Intel
and


Qualcomm.

In
reporting
better-than-expected

quarterly
results
on
Wednesday,
Arm
gave
investors
some
new
data
to
suggest
that
its
growth
rate
could
persist
through
the
next
fiscal
year.
Arm
said
it
was
breaking
into
new
markets
thanks
to
AI
demand,
and
that
its
primary
market,
smartphone
technology,
was
recovering
from
a
slump.

Arm
has
a
different
business
model
than
Nvidia
and
AMD
in
that
it’s
largely
a
technology
licensing
company.
Arm
said
its
royalties
business,
in
which
billions
of
chips
manufactured
each
quarter
result
in
a
small
fee
to
use
the
company’s
architecture,
was
surprisingly
strong.
That’s
because
it
can
charge
twice
as
much
for
its
latest
instruction
set,
called
Arm
v9,
which
accounted
for
15%
of
the
company’s
royalties.

“Arm
continues
to
gain
market
share
in
the
growth
markets
of
cloud
servers
and
automotive
which
drive
new
streams
of
royalty
growth,”
the
company
said
in
its
investor
letter.

Arm’s
revenue
forecast
for
the
current
quarter
points
to
38%
annual
growth
at
the
midpoint
of
the
range,
marking
a
significant
acceleration
from
recent
periods.
But
for
Nvidia,
analysts
are
expecting
growth
of
over
200%
for
the
January
quarter
and
almost
that
level
the
next
period.

AMD
has
been
growing
much
slower
and
is
expected
to
remain
in
the
single
digits
until
the
back
half
of
the
year,
when
expansion
is
expected
to
accelerate.

While
Arm
has
some
AI
chip
development,
its
technology
is
oriented
around
the
central
processor,
or
CPU.
AI
chips
are
often
graphics
processors,
or
GPUs,
which
use
a
different
approach
to
running
multiple
calculations
at
the
same
time.

Still,
Arm
says
it
stands
to
benefit
from
AI
chips.
CEO
Rene
Hass
mentioned
Nvidia’s
Grace
Hopper
200
chip,
which
will
start
shipping
in
finished
systems
in
April,
on
a
call
with
analysts.
That
chip
combines
one
of
Nvidia’s
GPUs
—
an
H100
—
with
a
CPU
that
uses
Arm’s
Neoverse
design.

“The
drivers
and
direction
of
travel
for
Arm
are
as
outlined
at
the
time
of
its
IPO,
but
the
timing
and
slope
is
sooner
and
steeper
due
to
AI.”
wrote
Citi
analyst
Andrew
Gardiner
in
a
note
on
Thursday.
“Given
we
are
in
the
very
early
innings
of
AI
adoption,
we
expect
Arm’s
sales
trends
to
remain
robust
into
FY25/26.”

The
company
said
that
its
backlog
of
expected
licensing
sales
rose
42%
on
an
annual
basis
to
$2.4
billion.

For
Son
and
SoftBank,
the
fortuitous
scuttling
of
the
Nvidia-Arm
deal
means
an
opportunity
for
the
Japanese
conglomerate
to
directly
benefit
from
the
growth
in
AI
and
the
premium
that
Wall
Street
is
placing
on
chip
companies
at
the
center
of
the
action.

SoftBank
on
Thursday
said
its
Vision
Fund
investment
group
logged
a
$4
billion
gain
in
the

latest
quarter,
after
a
brutal
stretch
of
losses
from
bad
bets
like
WeWork.
SoftBank
said
in
the
December
quarter
that
it
booked
an
investment
gain
of
$5.5
billion
thanks
to
the
Arm
IPO.

If
the
stock
can
hold
at
these
levels
or
even
keep
going
up,
more
gains
are
in
store.

“Arm
is
the
biggest
contributor
to
the
global
AI
evolution,” SoftBank
finance
chief
Yoshimitsu
Goto
said
during
an
earnings
presentation
on
Thursday.
He
even
went
so
far
as
to
call
SoftBank’s
investment
pool
an
“AI-centric
portfolio.”

—
CNBC’s
Arjun
Kharpal
contributed
to
this
report

WATCH:

CNBC’s
full
interview
with
Arm
CEO
Rene
Haas