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Arm Holdings Has That Trillion-Dollar Look

June 30, 2024

On 7 December 1941, the Japanese launched a surprise attack on the US naval base at Pearl Harbour, ‘a date which will live in infamy’, as Franklin Roosevelt described it or as comedian Kenneth Williams, put it in one of the Carry On films, ‘Infamy, Infamy, they’ve all got it in for me!’. So it was but it was also an incredible moment to buy US stocks on the cusp of the greatest period of wealth creation in the history of capitalism.

At the time the index was around seven v 5,482 currently. If the Nasdaq and the Nasdaq 100 had existed when my father’s first child had just been born that index would have climbed even more. People may have issues with America, mostly not shared by me, but boy are they good at shareholder capitalism.

This index looks as full of beans as ever with a fresh chart breakout on this ultra-long-term chart. The great post-war bull market remains in full flood.

Time To Take Up ARMs

There were many jokes about the interaction between US soldiers stationed in the UK during the war and the locals. ‘Overfed, overpaid, oversexed, and over here’ was one; another was ‘one Yank and they’re off’. Paraphrasing this for Arm Holdings we could describe the shares as ‘overvalued, oversexed (because the stock – and the business – is red hot) and over there’ because they are based in Cambridge but quoted on Nasdaq in the US.

The valuation is demanding and will always be the elephant in the room when discussing Arm as an investment. A valuation of $175bn compares with revenue for the latest quarter of $928m. If we round that up to $4bn annualised the company is valued at nearly 44 times sales. For comparison, Nvidia is on around 25 times sales and growing faster.

Part of the problem is that the free market in Arm shares is small because the Japanese company, Softbank, has a 90pc stake. It bought 100pc of Arm in 2016 for $32bn. Softbank famously missed out on $150bn by selling Nvidia too early so I don’t think they will rush to sell down their Arm stake. Arm shares will likely always be expensive.

What is extraordinary is that by holding them Softbank may get another bite at the AI cherry. Softbank has a good chart but I would still rather buy Arm directly.

This is what a bullish analyst on Seeking Alpha has to say.

Arm Holdings (NASDAQ:ARM) stock is one of the hottest amid the AI-fueled stock market craze. In these circumstances, it is crucial to differentiate bubbles from true disruptors. ARM definitely does not look like a bubble. Its undisputed dominance in CPUs for smartphones generates above 90pc gross margin, which gives the company a flood of cash to reinvest in innovation. In recent years, ARM has significantly diversified its revenue mix and has solid exposure to various hot end markets. I think that Arm has vast potential in data centres, as its architecture for data centre chips is disrupting legacy x86 architecture, which is evident from the expanding market share. ARM’s valuation is sky-high, but this is normal for a disruptor. I am initiating a position in ARM and give it a “Strong Buy” rating but realize that the stock can easily dip by 40-50pc like other big disruptors did. However, I will be happy in this case because a big drop will give me an opportunity to significantly expand my position in this disruptor.

Seeking Alpha (Dair Sansyzbayev), 17 May 2024

Historically, Arm has been overwhelmingly dominant in mobile phones, a market that is mature and unlikely to grow rapidly but is finding new games to play.

The cloud computing industry is experiencing strong momentum as technological giants are fighting fiercely to get a competitive edge amid the AI revolution. Cloud giants like Amazon (AMZN), Microsoft (MSFT), and Google (GOOGL) are ramping up their investments in data centres. Each of these companies announced their multibillion plans to expand their data centre infrastructure across the world, which I describe in one of my recent articles. Historically, x86 CPUs dominated the market for data centres. However, as technologies move forward, more efficient solutions are needed. According to an article from exxactcorp.com, ARM CPUs provide higher computing efficiency, and they also consume less power compared to x86 processors.

The strong potential of ARM-based processors is evident from recent announcements from tech giants. Google recently unveiled its new ARM-based data centre AI chip. In late 2023, Microsoft announced its in-house ARM-based CPU as well. Amazon, the undisputed global leader in cloud computing, owns more than half of all ARM server CPUs in the world. ARM can likely move to the forefront of the chip revolution for data centres and cloud computing, which opens vast growth opportunities for the company due to its ownership of the intellectual property for the Acorn RISC Machine architecture.

Seeking Alpha (Dair Sansyzbayev), 17 May 2024

The guys in the chat rooms are raging bulls of Arm Holdings just as they have been for years with Nvidia.

ARM is the best way to invest in AI right now because it is brand agnostic. They design and license patents for the most power-efficient chips in the world. If you don’t believe me, look at their massive client list. Their patents are critical at this historic inflection point as companies retool for AI. There’s no time to reinvent another architecture for this first phase of industry AI adoption. The Nvidia conference may boost ARM’s stock depending upon how public they decide to be about their ARM relationship… But really, it doesn’t matter. Nvidia chips = ARM licensing profit. Same with Apple, AMD, and others. Very good long-term investment.

Kelly, Yahoo Finance, 18 March 2024

Arm had its roots in the founders’ realisation that batteries would be increasingly critical as the technology revolution spread from mainframe and desktop computers to portable devices like laptops and smartphones. They set out to design the most energy-efficient chips and adopted a licensing and royalty business model so that Arm, based in the heart of Cambridge University, could focus on research and development. Arm is at heart a giant research lab which gives it the ability to pivot so fast and effectively from smartphones to the Internet of Things, car automation, GenAI and anything else that may come along.

Strategy – Buy Shares in Arm Holdings

Time and again when the only reason not to buy a share is the valuation it is the share that you should buy. I expect Arm Holdings to be a classic example. It is a hunch but I have a good feeling about this one.

The graphic below shows how an incredible 69pc of Arm’s quarterly revenue generates free cash flow. A fast-growing company (sales grew 47pc in the latest quarter) trading at around 70 times free cash flow suddenly doesn’t look so expensive.

Arm looks like a perfect business to benefit from an increasingly technology-dominated world, where energy efficiency is becoming centre stage.

“We finished our financial year achieving over $3bn in revenue for the first time, and with strong tailwinds heading into FYE25 as AI is driving increased demand for Arm-based technology across all end markets,” said Rene Haas, CEO. “From cloud to edge, all AI software models, from GPT to Llama, rely and run on the Arm compute platform. As these models become larger and smarter, their requirements for more compute with greater power efficiency can only be realized through Arm.”

Rene Haas, CEO, Arm Holdings, Q4 2024, 8 May 2024

The key thing to remember about Arm and any share with exciting long-term growth prospects is that what matters is rarely the valuation and almost invariably the success of the business. If Arm delivers on the CEO’s expectations it will be a great investment.

Like Nvidia and other shares, its prospects and growth rate have been dramatically enhanced as semiconductors move centre stage in the global economy.

Share Recommendations

Arm Holdings. ARM Buy @ $163.50

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