SoftBank’s Arm doubles in value within days as AI hype builds; What next?

Investing.com-- Arm- the British chip designer which is majority owned by SoftBank, saw its market valuation more than double in a matter of days after it flagged improved earnings on increasing demand from artificial intelligence.

Arm Holdings (NASDAQ:ARM) saw its market capital surge to $153.2 billion from about $70 billion since late-Thursday- ranking the chip designer among the world’s most valuable chip companies just months after its listing in November. 

The gains were triggered by a stronger-than-expected profit for the December quarter, while Arm also hiked its outlook substantially on expectations of stronger demand from an AI boom. 

The chip designer earns royalties from licensing its designs, which are used by the biggest chipmakers in the world. NVIDIA Corporation (NASDAQ:NVDA)- which is at the heart of a recent AI-led boom, is one of Arm’s biggest customers.  

Arm’s surge provided SoftBank Group Corp. (TYO:9984) with a massive windfall of over $100 billion. SoftBank holds a 90% stake in the chip designer, with its stake in the firm valued at about $130 billion- more than SoftBank’s own market cap of about $85 billion. 

Shares of the Japanese tech investment giant also surged more than 20% since Thursday, and were at their highest level since May 2021. 

Arm dips in aftermarket trade, near-term losses on tap? 

But Arm fell 3% in aftermarket trade on Monday, with the stock now appearing vulnerable to profit-taking after its stellar rally. 

Investing.com data showed the stock trading at a staggering 135.9 times its projected earnings- a trend that usually heralds some near-term losses. Nvidia- which saw its market capital surge in early-2023, had also seen some profit-taking after its price-to-earnings ratio skyrocketed. 

SoftBank may also sell some of its shares in Arm when a post-IPO lock-up period ends in early-March. 

Still, Arm's long-term prospects appeared positive, especially amid the growing popularity of AI. Nvidia- which still has a P/E ratio of 96.5, saw its market capital triple in 2023, with the chipmaker recently overtaking Amazon.com (NASDAQ:AMZN) to become the fourth-largest firm on Wall Street.

“To most observers, the sudden valuation increase doesn’t match up to the earnings statements and forward projections,” Ryan Shrout, Founder and Principal Analyst at Shrout Research said in a recent blog post. 

“The key to me is the royalty revenue stream and its growth over the next 1-3 years… As more of the Arm product mix moves towards (the) more advanced, more capable, and more profitable Armv9 architecture, then royalty revenue for the company stands to increase at a higher rate than individual unit growth.” 

Arm’s December quarter earnings showed that the firm was diversifying from its dependence on smartphone chips, and into servers, automobiles and portable devices. 

The firm had also noted that increasing demand for AI development was likely to drive up demand for high-performance chips. Shrout noted that Arm was likely to benefit from more firms developing their own silicon to compete with Nvidia and Advanced Micro Devices Inc (NASDAQ:AMD) processors.