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Arm’s post-earnings pop leaves stock trading at premium to Nvidia, AMD

The logo of the semiconductor design company Arm on a chip.

Jakub Porzycki | Nurfoto | fake images

Exactly two years ago, Nvidia An attempt to buy chip designer Arm from SoftBank has come to an end due to “significant regulatory challenges.”

Masayoshi Son, the billionaire founder of SoftBank, has never been so lucky.

That deal 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 more than $116 billion. dollars after shares soared 48% on Thursday.

SoftBank still owns about 90% of the outstanding shares, meaning its stake in Arm increased by more than $34 billion in one day.

But the rally is somewhat confusing when you look at how the market values ​​Arm. Wall Street may begin to get a clearer idea of ​​how much investors are willing to pay next month, when the 180-day lock-up period expires and SoftBank gets its first chance to sell.

One analyst says Nvidia has

Chip makers Nvidia and amd They have been a favorite of Wall Street lately due to their central position in the rise of artificial intelligence. Nvidia makes most of the processors used for cutting-edge AI models like those powering ChatGPT, while big tech companies have also indicated interest in buying 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 value Arm at about 90 times forward earnings. That compares with a forward price-to-earnings ratio of 33 for Nvidia and 46 for AMD, which have significantly higher multiples than other major chip stocks like Intel and Qualcomm.

Reporting better-than-expected quarterly results on Wednesday, Arm provided investors with some new data that suggests its growth rate could persist into the next fiscal year. Arm said it was entering new markets thanks to demand for AI and that its core market, smartphone technology, was recovering from a crisis.

‘Gain market share’

Arm has a different business model than Nvidia and AMD in that it is primarily a technology licensing company. Arm said its royalty business, in which billions of chips manufactured each quarter generate a small fee for using 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 growing cloud server and automotive markets, driving new streams of royalty growth,” the company said in its letter to investors.

Arm’s revenue guidance for the current quarter points to 38% year-over-year growth at the midpoint of the range, marking a significant acceleration from recent periods. But for Nvidia, analysts expect more than 200% growth for the January quarter and almost that level in the coming period.

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

Lisa Su, president and CEO of AMD, speaks about the AMD EPYC processor during a keynote speech at CES 2019 in Las Vegas, Nevada, U.S., on January 9, 2019.

Steve Marcos | Reuters

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

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

“Arm’s drivers and direction of travel are as described at the time of its IPO, but the momentum and slope are faster and steeper due to AI.” Citi analyst Andrew Gardiner wrote in a note Thursday. “Given we are in the early stages of AI adoption, we expect Arm’s sales trends to remain strong in FY25/26.”

The company said its expected license sales pipeline rose 42% year over year to $2.4 billion.

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

SoftBank said Thursday that its Vision Fund investment group posted a $4 billion profit in the latest quarter, after a brutal streak of losses from bad bets like WeWork. SoftBank said in the December quarter that it posted an investment gain of $5.5 billion from the Arm IPO.

If the stock can hold at these levels or even continue to rise, more gains are in store.

“Arm is the biggest contributor to the global evolution of AI,” SoftBank CFO Yoshimitsu Goto said during an earnings call Thursday. He even went so far as to call SoftBank’s investment fund an “AI-focused portfolio.”

—CNBC’s Arjun Kharpal contributed to this report.

LOOK: Full CNBC interview with Arm CEO Rene Haas

Watch the full CNBC interview with Arm Holdings CEO Rene Haas
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