Arm’s post-earnings boom leaves the stock market at a premium to Nvidia and AMD

Exactly two years ago, Nvidia’s An attempt to buy chip designer Arm from SoftBank ended due to “significant regulatory challenges.”

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

That deal would have resulted in Arm being sold 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 jumped 48% on Thursday.

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

But the rally is a bit confusing when you look at how the market values ​​Arm. Wall Street may start 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 has its first opportunity to sell.

Chip manufacturers Nvidia and AMD have been the darlings of Wall Street of late due to their central position in the artificial intelligence boom. Nvidia makes the majority of processors used for cutting-edge AI models like those powering ChatGPT, while big tech companies have also indicated their interest in buying competitive chips from AMD as soon as they hit the market.

But Arm is now valued at a much higher earnings multiple than either company. As of Thursday’s close, investors valued Arm at nearly 90 times forward earnings. This compares to a P/E ratio of 33 for Nvidia and 46 for AMD, both of 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 through the next fiscal year. Arm said it is entering new markets thanks to demand for artificial intelligence and that its primary market, smartphone technology, is recovering from a crisis.

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 billions of chips produced each quarter charge a small fee for using the company’s architecture, has been surprisingly strong. That’s because it can charge double the price 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, which drive new streams of royalty growth,” the company said in its letter to investors.

Arm’s revenue forecast for the current quarter calls for 38% annual growth at the midpoint of the range, marking a significant acceleration over recent periods. But for Nvidia, analysts expect growth of more than 200% for the January quarter and nearly that level for the period thereafter.

AMD has seen much slower growth and is expected to remain in the single digits until the second half of the year, when expansion is expected to accelerate.

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

However, 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.

“The drivers and direction of travel for Arm are as outlined at the time of its IPO, but the timing and slope is faster and steeper due to AI.” Citi analyst Andrew Gardiner wrote in a note Thursday. “Given that we are in the early stages of AI adoption, we expect Arm’s sales trends to remain robust in fiscal 25/26.”

The company said its backlog of expected license sales increased 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 artificial intelligence and the premium Wall Street is placing on the chip companies at the center of the action.

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

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

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

— CNBC’s Arjun Kharpal contributed to this report

CLOCK: Full CNBC interview with Arm CEO Rene Haas