Shares of semiconductor design firm Arm (NASDAQ:ARM) have really started to heat up again, with the stock near an all-time high. Undoubtedly, Arm is doubling down on the artificial intelligence (AI) race in a big way with its decision to develop its own specialized AI chips rather than focusing on licensing the Arm architecture to a wide range of tech titans. Indeed, anything that remotely touches AI chips has been blistering hot of late.
Arm has gotten a shot in the arm (pardon the pun) lately, with the stock soaring 8% on Wednesday and more than 15% this week. The stock’s seemingly obscene valuation multiple may very well be worth paying up for as Arm flexes its own AI chip muscles while continuing to license designs to other firms, like Apple (NASDAQ:AAPL), for their custom Arm chips.
It certainly did not take long for Arm to recover from its post-IPO bust, which saw the stock shed more than 40% of its value in a span of a few months. As Arm stock begins going parabolic in this latest leg of the AI-driven rally, momentum chasers are sure to return, but whether they’ll be rewarded or punished remains the billion-dollar question.
There’s expensive, and then there’s Arm stock level expensive, which is another level. If growth can keep up, maybe our perception of Arm’s high valuation could change. After all, Nvidia (NASDAQ:NVDA) showed us all the kind of gravity-defying growth that’s possible with AI chips in this wave of the AI boom.
Arm Stock’s Growth Prospects are Improving, And So Is the Valuation
Though only time will tell if today’s hefty price of admission is worthwhile, I view Arm as one of the most profound forces in the AI race right now. Whether it’s the newly announced AI chip division (with the coming Arm-built AI chip next year), the asset-light licensing business, or subsequent plans to mass produce these chips with partners, it’s hard to be anything but bullish on ARM stock right here. And that’s despite the frothy, borderline absurd 45.23 times price-to-sales (P/S) multiple.
Moreover, the 93.5 times forward price-to-earnings (P/E) ratio isn’t any more palatable for the value-conscious investors out there. Nevertheless, that’s the sticker price you’ll need to pay if you want explosive growth in this stage of the AI boom.
Arm may not be a tech behemoth quite yet, with a market cap of $162 billion. That said, given the improving growth narrative and the wide economic moat surrounding the Arm architecture, maybe it’s not too far-fetched to envision Arm making a run for a $500 billion valuation.
Perhaps there was a reason Nvidia wanted to buy the company so badly before it had the chance to go public.
Arm: The One That Got Away from Nvidia?
As you may know, Nvidia’s CEO, Jensen Huang, is a genius and one of the most legendary AI visionaries out there today. If he wants to buy a company, you can bet that it’s a frontrunner in the AI race and that it’s probably well worth the price of admission. Indeed, it was probably a good thing that regulators stood in the way before too much AI power was placed into the hands of just one firm.
It’s hard to believe that Arm’s valuation has more than quadrupled from the $40 billion cash-and-stock Nvidia offer that was very quickly shot down by numerous regulators. Though you can’t buy Arm stock at the valuation that Mr. Huang sought to acquire the firm (that time has come and gone), I still think there’s serious growth potential on the horizon as Arm continues dominating the CPU (central processing unit) scene.
There’s a reason why Apple and other AI chip designers have embraced Arm with open arms: it’s effectively the new standard in performance and efficiency.
Not to mention, Arm is better suited for AI inference and mixed-reality (MR) processing compared to the good, old x86 architecture that Apple has been using. Apple recognized this early, and many other firms are following in the footsteps of the Cupertino iPhone maker. If Arm is talented enough to construct such a powerful new architectural standard for modern, say, CPUs, perhaps it’s also smart enough to build the very best chip.
Besides, nobody knows the way around the architecture better than its creator, right?
Personally, I’m excited to see how Arm’s own chip fares when it launches next year. However, it’s quite a stretch to think it’ll be as good as Apple’s M-series line of chips. Arguably, the M4 seems to be miles ahead when it comes to chips powering consumer products. If there is one firm to give the M-series a run for its money, though, it’s Arm.
Is ARM Stock a Buy, According to Analysts?
On TipRanks, ARM stock comes in as a Moderate Buy. Out of 16 analyst ratings, there are 11 Buys, four Holds, and one Sell recommendation. The average ARM stock price target is $121.00, implying downside potential of 23.4%. Analyst price targets range from a low of $85.00 per share to a high of $160.00 per share.
The Bottom Line on ARM Stock
Arm stock is incredibly expensive, but it deserves to be expensive, and it could become a whole lot more expensive as the AI boom continues. The launch of its own AI chip could provide a huge boon for growth and may be the PC’s answer to the Mac’s M-series chip. Looking back, it’s clear that Arm was the firm that got away from Nvidia.
As to whether the stock’s getting away from investors, though, remains the big question. There’s a lot on the line as Arm doubles down on the AI wars. If it can pull it off, more gains could easily be in the cards. However, even though I’m bullish, I’m sitting on the sidelines until another one of those steep AI-focused market sell-offs comes before punching my ticket.
