Arm’s post-earnings pop leaves high-level stock trading to Nvidia, AMD

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

Jakub Porzycki Nurphoto | Getty Images

Just two years ago, Nvidia at an attempt to buy the Arm chip designer from SoftBank ended 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 now worth more than $116 billion after the stock surged 48% on Thursday.

SoftBank still owns about 90% of the outstanding stock, meaning its stake in Arm rose by more than $34 billion in a day.

But the rally is somewhat confusing when looking at how the market values ​​Arm. Wall Street may begin to get a clearer sense of what investors are willing to pay next month, when the 180-day lockup period ends and SoftBank has its first chance to sell. .

Analyst says Nvidia has 'a lot of upside', but makes his bear case

Chipmakers Nvidia and AMD have been the darlings of Wall Street lately because of their pivotal position in the growth of artificial intelligence. Nvidia makes most of the processors used for modern AI models like the ones powering ChatGPT, and big tech companies have also expressed interest in ‘buy competing chips from AMD while they hit the market.

But Arm is now valued at a much higher earnings number than either of those companies. As of late Thursday, investors are valuing Arm at nearly 90 times earnings. That compares to a price-earnings ratio of 33 for Nvidia and 46 for AMD, which 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 suggesting its growth rate could continue through the next fiscal year. Arm said it was breaking into new markets due to AI demand, and that its core market, smartphone technology, was recovering from a decline.

‘Gain market share’

Arm has a different business model than Nvidia and AMD in that it is largely a technology licensing company. Arm said its royalty business, in which the billions of chips produced each quarter generate a small fee for using the company’s architecture, was surprisingly strong. That’s because he can pay twice as much for his latest set of instructions, called Arm v9, which accounted for 15% of the company’s royalties.

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

Arm’s revenue forecast for the current quarter points to mid-range annual growth of 38%, marking a significant acceleration from recent times. But for Nvidia, analysts expect growth of more than 200% for the January quarter and almost that level next period.

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

Lisa Su, president and CEO of AMD, discusses the AMD EPYC processor during a keynote speech at CES 2019 in Las Vegas, Nevada, USA, January 9, 2019.

Steve Marcus | Reuters

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

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

“The drivers and path of travel for Arm are as described at the time of its IPO, but the timing and slope is faster and steeper because of AI,” Citi analyst Andrew Gardiner wrote in a note. Thursday. “As we are in the early stages of AI adoption, we expect Army sales trends to remain strong through FY25/26.”

The company said the backlog of expected franchise sales rose 42% year over year to $2.4 billion.

For Son and SoftBank, the lucky streak of the Nvidia-Arm deal means an opportunity for the Japanese conglomerate to directly benefit from the growth in AI and the price Wall Street is placing on chip companies at the heart of the work

SoftBank said Thursday that its investment group Vision Fund recorded a profit of $ 4 billion in the last quarter, after brutal losses from bad bets like WeWork. SoftBank said in the December quarter that it retained an investment gain of $5.5 billion thanks to the Army IPO.

If the stock stays at these levels or even continues to rise, there are more benefits.

“Arm is a major contributor to the evolution of global AI,” SoftBank’s chief financial officer, Yoshimitsu Goto, said at Thursday’s earnings call. He even went so far as to call SoftBank’s investment pool an “AI-centric portfolio.”

— CNBC’s Arjun Kharpal contributed to this report.

Correction: Rene Haas is the Chief of Army Staff. An earlier version of it got his name wrong.

Watch: Full CNBC interview with Army Chief Rene Haas

Watch the full CNBC interview with Arm Holdings CEO Rene Haas

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