move and Nvidia. A new artificial intelligence (AI) stock is making ripples across Wall Street.
arm holdings (arm -6.65%) Launched less than six months ago, the chip company best known for licensing low-power processor designs has even surpassed Nvidia since the start of 2024. Through March 6, Arm stock is up 82% for the year. Nvidia increased his 79%.
Arm shares soared on February’s earnings report after the company beat quarterly estimates and significantly raised its outlook for the fiscal year. The company also revealed that it is fully participating in the AI boom.
“The AI wave has driven licensing growth as these new devices require Arm’s high-performance, power-efficient computing platform,” CEO Rene Haas said in a press release in the third quarter of fiscal 2024. stated in the release. The company also noted that the higher-than-expected 18% growth in licensing revenue was due to demand for more advanced Arm CPUs as companies increase spending on AI.
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This week, Arm will face perhaps its biggest test as a publicly traded company. The company’s post-IPO lockup period expires on Tuesday, giving insiders the opportunity to sell their shares for the first time. For high-tech IPOs like Arm, lockup expirations often cause stock price fluctuations.
If there is significant selling among insiders, the stock price will likely find a new equilibrium with increased free float and the stock price will likely fall. However, Arm is likely to benefit if insiders own shares, because it signals confidence in the future from those who know the company best.
What to expect from Arm lockup expiration
Less than 10% of Arm’s 1.03 billion outstanding shares are currently publicly traded. Prior to its IPO, Arm was owned by the following companies: Softbank Group (SFTBF -2.59%)took the company private in 2016.
SoftBank sold 95.5 million shares in the IPO and gave underwriters an option to sell an additional 7 million shares. As a result, SoftBank now holds approximately 90.6% of the shares. In addition to allowing SoftBank Group and CEO Masayoshi Son to sell their shares, Arm employees will also be able to sell 11.4 million restricted shares that were previously prohibited.
Why Arm stock needs to pass the test
Some Arm employees are likely to take advantage of the opportunity to sell, as the company’s stock has nearly tripled from its public offering price of $51, but SoftBank is likely to continue holding on to the company’s stock. The reason can be explained with a little game theory.
Son owns $100 billion worth of Arm stock and wants to protect its value. He made a terrible mistake by dumping a large amount of stocks and causing the stock price to plummet. Because SoftBank chose to take Arm public, it will likely sell its shares gradually over time, but the value of the stock will not be at risk. Arm appears to be the most promising play in the AI boom right now, so it’s possible that SoftBank will retain all of its shares.
Softbank has had its share of hits and misses over the past few years. The company famously lost billions on WeWork, and Son will no doubt want to protect the profits he made on Arm, which his company took private in 2016 for $32 billion. I believe. Therefore, a post-lockup stock price crash is unlikely, although it could happen. What if Mr. Son starts selling off a large portion of his SoftBank shares?
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No matter what happens, Arm looks like it will be a good buy in the long run.
The stock is likely to be volatile this week, but long-term investors should look past the noise and focus on the company’s fundamentals and its bright future in the AI space.
Arm stock is expensive, trading at a price-to-earnings ratio of 112 times this year’s expected adjusted EPS, but the company has several competitive advantages and growth will accelerate as AI applications become mainstream. You should.
First, the company has a close working relationship with Nvidia, which tried to acquire the company in 2020. For example, Nvidia licenses technology from Arm’s GH 200 Grace Hopper superchip, a key component of its AI servers. super microcomputer, Dell Technologies, hewlett packard enterpriseand other products, representing the next generation of the H100, which has been in high demand for running AI models since the launch of ChatGPT.
Additionally, Arm’s unique business model should be an advantage. Rather than selling products directly to end users like most semiconductor companies, Arm licenses its technology to chip partners such as Nvidia and Nvidia. alphabetWe partner with Google and receive royalties from products sold using Arm’s architecture. This gives Arm a smoother revenue stream than most chipmakers. One of the reasons why the stock soared so much after last month’s earnings report was because Arm’s licensing revenue was higher than expected, and since royalties are accrued on new licenses, this could be a major factor in royalty revenue in the coming quarters. It bodes well.
Similarly, Arm’s low-power CPU architecture, which is highly praised in smartphones, is also extremely valuable for running AI models, which tend to use relatively large amounts of power. This advantage should lead to increased demand for licenses over the next few quarters and also increased royalties in the future. Although the company did not provide forecasts for fiscal 2025, sales and profit growth are likely to accelerate as the company benefits further from the AI boom.
Current shareholders and those considering purchasing shares should pay close attention to what happens when the lock-up period ends on Tuesday. But no matter what happens this week, the business looks well-positioned for strong growth over the next few years. Still, if the market reacts with a significant drop as the lockup expires, it could be a good buying opportunity for hot AI stocks.
