Arm post-earnings buzz sends stocks trading higher for Nvidia and AMD

The agreement included selling Arm for $40 billion, 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 after its stock price 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 this rise is a little confusing when you look at how the market values ​​Arm. Wall Street may start to get a clearer picture of how much investors are willing to pay next month, when the 180-day lockup period expires and SoftBank gets its first opportunity to sell.

Chipmakers Nvidia and AMD have recently become Wall Street darlings due to their central position in the artificial intelligence boom. While Nvidia makes the majority of the processors used in cutting-edge AI models like those that power ChatGPT, big tech companies also buy from AMD when competitive chips come to market. has shown interest in

But Arm is currently valued at a much higher earnings multiple than either of those companies. As of Thursday’s close, investors valued Arm at nearly 90 times forward earnings. By comparison, NVIDIA’s forward price/earnings ratio is 33x and AMD’s is 46x, both significantly higher multiples than other major chip stocks such as Intel and Qualcomm.

Arm, which reported better-than-expected quarterly results on Wednesday, provided investors with new data that suggests its growth rate could continue into next year. Arm said it is entering new markets thanks to demand for AI, and said its main market, smartphone technology, is recovering from a downturn.

Arm has a different business model than Nvidia and AMD in that it is primarily a technology licensing company. Arm said its royalty business, which pays small royalties for the billions of chips it makes each quarter for the use of its architecture, was surprisingly strong. That’s because it can charge twice as much for the latest instruction set, called Arm v9, which used to make up 15% of the company’s royalties.

“Arm continues to gain market share in the growing markets of cloud servers and automobiles, which is driving new incremental royalty streams,” the company said in a letter to investors.

Arm’s current quarter earnings forecast indicates 38% annual growth at the midpoint of the range, representing a significant acceleration from recent periods. However, for NVIDIA, analysts expect his growth rate in the January quarter to exceed his 200% and to be at about the same level next quarter.

AMD’s growth has slowed considerably and is expected to remain in the single digits until the second half of this year, when expansion is expected to accelerate.

Arm is developing AI chips, but its technology is oriented around a central processor, or CPU. AI chips are often graphics processors (GPUs), which use different approaches to perform multiple calculations simultaneously.

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

“Arm’s momentum and direction are as outlined at the IPO, but the timing and slope will be earlier and steeper thanks to AI,” Citi analyst Andrew Gardiner said in a note Thursday. He said this: “Given that we are in the early stages of AI implementation, we expect Arm’s sales trends to remain strong in the fiscal year ending March 2025 and beyond.”

The company announced that its prospective license sales balance increased 42% on an annual basis to $2.4 billion.

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

SoftBank said Thursday that its Vision Fund investment group posted a $4 billion profit in its latest quarter, after suffering steep losses on bad bets such as WeWork. SoftBank announced a $5.5 billion investment gain in the December quarter thanks to Arm’s IPO.

If the stock price can maintain these levels, or continue to rise, further gains await.

“Arm is the biggest contributor to the evolution of AI worldwide,” SoftBank’s finance chief Yoshimitsu Goto said during an earnings call Thursday. He went so far as to call SoftBank’s investment pool an “AI-centric portfolio.”

— CNBC’s Arjun Kharpal contributed to this report

clock: Full CNBC interview with Arm CEO Rene Haas