Last week, the British chip company arm Holdings captured the attention of all of Wall Street with a sudden increase in its share price. The company’s value jumped by about 125% since its issuance six months ago, reaching a valuation of approximately 118 billion dollars. The reason behind this sudden surge was due to encouraging reports and strong forecasts for the future, thanks to high demand from the field of artificial intelligence (AI). So is arm truly the new hot stock on Wall Street? Or were investors blinded by AI hype and the increase was just a fluke?
First, let’s take a look at what arm does. “In the chip world there are two architectures,” explains Sergey Vaschunok, a senior analyst at Oppenheimer Investment House. “The first is from Intel, which is used in home computers, and the second is from Arm, which is used in everything else. It holds patents on its architecture so that almost all companies are based on it and pay royalties to it.” Softbank owns about 90% of arm shares and benefits from this arrangement.
arm’s chips are used in various fields such as cellular (where it controls more than 99% of the market), vehicles (41%), IoT (where it controls 65%), and data centers (10%). In fact, almost every major technology company makes use of arm’s chip architecture including Amazon, Google, Meta, Microsoft – and Nvidia itself. This is why in 2020 Nvidia tried to purchase arm from Softbank for $40 billion but failed due to regulatory objections. Today, however, Softbank reaps significant profits from its stake in arm as its value continues to rise above $100 billion.
Last week arm reported its results for Q4 and exceeded analysts’ forecasts significantly. It reported an adjusted profit of $0.29 per share compared to expectations of $0.25 per share while revenues came in at $824 million compared to expectations of $760 million. For next year’s revenue range, arm expects $3.16-3.205 billion while analysts expect it to bring in $3.05 billion.
One factor driving this growth is Arm’s new V9 chip design architecture which may contribute twice as much in royalties compared to previous generations according to the company’s own assessment