Big Tech Competition Is Fueling Arm’s Growth — But Valuations Are Scaring Investors Off - The Average Joe

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    Big Tech Competition Is Fueling Arm’s Growth — But Valuations Are Scaring Investors Off

    victorlei

    May 8, 2024

    It’s been just over a month since Taiwan, the semiconductor mecca of the world, was rocked by a major 7.2 earthquake, and its effects are still rippling through the industry. The latest blow came from chip designer Arm ($ARM), whose earnings report yesterday caused its stock to drop by 7% after hours — as strong results were overshadowed by lower-than-expected full-year sales forecasts.

    Skipping Arm day: Arm, riding high on the wave of AI growth, has seen its stock double since its IPO last year. However, investors are beginning to worry that the AI-fueled market rally could be running out of steam. While chips designed by Arm power nearly every smartphone globally, it has gradually gained traction in data centers, increasing its market share from just under 1% in 2019 to 10.1% in 2022.

    • And it’s all thanks to Big Tech companies, which are building their own custom data center chips in-house, using Arm technology.
    • In 2018, Amazon ($AMZN) launched its first Arm-based data center chips — then nearly every other leading cloud provider followed, including Alibaba ($BABA) in 2021, Microsoft ($MSFT) in 2023, and finally Google ($GOOG) last month.

    Big Tech says no to leg days

    Beyond phones and data centers, Arm Holdings is also making headway in the PC market — where it’s projected to nearly double its notebooks market share from 14% in 2023 to 25% by 2027, according to Counterpoint. And it’s thanks to, yet again, competition among Big Tech companies racing to develop faster devices.

    • In 2020, Apple cut ties with Intel ($INTC) in favor of Arm for its MacBooks, prompting Microsoft to introduce its first Arm-powered laptops this year in an attempt to catch up to Apple’s ($AAPL) M3 chips.
    • If Microsoft’s new laptops deliver in performance, other PC manufacturers like HP ($HPQ) and Dell ($DELL) could begin their own rollout of Arm-powered PCs.

    Pushing the limit: With a price-to-sales ratio of 27x, Arm is the most expensive company on the Nasdaq-100 — surpassing Nvidia ($NVDA) at 19x. Making things even riskier, SoftBank owns nearly 90% of Arm, resulting in limited shares available for trading — which can lead to higher volatility and larger price swings. While the semiconductor industry shows promise for growth, investors wonder what lies ahead when you’re already at the top. Perhaps Nvidia’s earnings report on May 22 will provide some insight.

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