Last week, a British chip company named Arm Holdings caught the attention of Wall Street with its impressive stock performance. In just one day, the company’s share price jumped by about 50%, and since it was issued less than six months ago, it has completed a jump of 125% to a value of approximately 118 billion dollars. The reason for this recent increase is encouraging reports and good forecasts for the future due to strong demand from the field of artificial intelligence.
But what exactly is Arm Holdings? Sergey Vaschunok, a senior analyst at Oppenheimer Investment House explains that there are two architectures in the chip world: Intel’s architecture, which is used in home computers, and Arm’s architecture, which is used in everything else. Arm owns a patent on its architecture, which means that almost all companies are based on it and pay royalties to it. Companies like Amazon, Google, Meta, Microsoft – even Nvidia itself – make use of Arm’s chip architecture.
In fact, last year Nvidia tried to purchase Arm from Softbank for 40 billion dollars (compared to 32 billion at the time of Softbank’s purchase), but British and American regulators objected and the deal fell through in 2022. Today, Softbank owns about 90% of arm shares and benefits from all this goodness.
Last week, Arm Holdings reported its results and exceeded analysts’ forecasts significantly. It reported an adjusted profit of 29 cents per share in the last quarter compared to forecasted 25 cents per share and revenues of $824 million compared to expected $760 million. For next year, the company expects revenue of $3.16-3.205 billion compared to analysts’ expectations of $3.05 billion.
The sharp increase in Arm’s share price last weekend could be a sign of pessimism in the company or simply because its pricing is currently not attractive enough after jumping so high so fast. If three months ago 19 analysts recommended buying its stock today only 16 analysts do so according to Wall Street Journal survey indicating that there may be other cheaper options for investors looking to play in the AI race such as Nvidia or AMD with lower earnings multiples (Nvidia stands at 34 while AMD stands at 32). However if you want high growth potential with high-paying dividends then investing in ARM Holding might be worth considering as it offers a gross profitability almost reaching 100%.