Arm Stock: Read This Before Buying

Arm Holdings (Nasdaq: ARM) could be one of the key beneficiaries of the AI arms race – along with companies like Nvidia (Nasdaq: NVDA) and SMCI (Nasdaq: SMCI). The UK-based chip company just recently went public last September. Since then, Arm stock has more than doubled from an IPO of roughly $60/share to $135/share. The question is: does Arm stock have more upside potential ahead of it?

Arm Stock: What to Know

Arm Holdings is known for creating power-efficient CPUs. On its website, Arm boasts that it has 280+ billion chips in “everything from sensors to smartphones to servers.” It also claims to have helped power the smartphone revolution, since its chips are known for being small, efficient, and powerful. Arm is confident that this success in smartphones will continue into the AI revolution.

Arm mainly operates in the following four industries: automotive, computing infrastructure, consumer technologies, and the Internet of things.

In other words, the company is in a good position to take advantage of the AI wave, since it powers tech across a range of industries. But, to get a better idea of whether Arm stock is worth buying, we need to take a closer look at its financial statements.

Arm Stock’s Most Recent Earnings:

To understand whether or not Arm stock is worth buying, let’s examine its three most recent quarters:

• • • Revenue: $824 million (+14% annually)
    • Net Income: $87 million (+52% annually)
  • September 2023:
    • Revenue: $806 million (+28% annually)
    • Net Income: -110 million (-196% annually)

• • Revenue: $675 million (-2% annually)
  • Net Income: $105 million (-53% annually)

On its earnings report, Arm claims to be a “strong growth, highly profitable and cash generative company.” But, based on these financials, this isn’t really the case. 

The chip-maker’s annual revenue was actually down from 2022 to 2023 ($2.7 billion vs $2.68). More recently, Arm posted revenue growth of just 14% last quarter. On one hand, any growth is still a positive sign. But, for a company that is supposed to be in one of the fastest-growing industries, this isn’t overly impressive. There are dozens of much larger, established companies whose revenue grows at a faster rate than Arm’s

But, these numbers don’t always tell the full story. To get more insight I read through Arm’s most recent quarterly report. Here are the biggest takeaways:

1. Delivered record Q3 revenues: Arm exceeded the high end of its guidance ranges for both revenue and non-GAAP EPS. It posted strong growth in royalty revenue and licensing revenue (its two main ways of making money).
2. The broader semiconductor market is recovering: Particularly in smartphones, which returned to strong growth in Q3.
3. Arm expects royalty revenue to drive growth: Especially in the automotive and cloud server sectors.

All pretty good news. So, is the main takeaway?

Arm Stock: Should You Invest?

I’ll be honest, Arm is a CPU company during the beginning of an AI revolution. This is like owning a pickax company in the midst of the California Gold Rush. Arm Holdings will most likely perform well over the coming years. But, Arm stock is not the best pick if you’re looking to capitalize on AI investing. Here’s why…

Arm stock brought in just $824 million last quarter, up 14%. Not bad. But, this level of income is just a drop in the bucket compared to other companies in the industry. The same goes for its revenue growth. 14% isn’t bad. But, it’s not explosive growth. If the company isn’t experiencing explosive growth then neither will the stock price. 

For comparison, Nvidia just posted quarterly revenue of $22 billion. Not only is this multiples higher than Arm, but it was also a growth rate of 265% year over year. If you’re going to buy an AI stock, why would you go with Arm over a company like Nvidia? Even a dinosaur like Dell (NYSE: DELL) feels like a better buy than Arm – due to its recent turnaround story.

AI: An All-or-Nothing Race

There’s a very good chance that the AI arms race will be an all-or-nothing race. In other words, every company wants to have the most cutting-edge technology. So, companies like Amazon (Nasdaq: AMZN) or Microsoft (Nasdaq: MSFT) only want to partner with the best of the best. This is why Microsoft partnered directly with ChatGPT-owner, OpenAI.

So far, Nvidia has proved itself as the leading AI computing company. During its recent 2024 AI Keynote event, Nvidia announced that it’s already providing computing power for most of the world’s biggest companies. As the industry moves forward, other companies will want to work with Nvidia by default – since it’s already established as the leader in AI. This means that companies like Arm will forever be an afterthought.

With this in mind, buying Arm stock feels a bit like going back in time to 2012 and choosing to invest in Myspace, instead of Facebook (Nasdaq: META). I’m not necessarily saying that Arm will go out of business in the coming years. But, it just won’t be nearly as successful.

Arm’s Absurd Valuation

As a final thought, I need to bring up Arm Holding’s insane valuation. As I write this, Arm has a market cap of just under $140 billion. At the same time, it brought in just under $3 billion in total revenue for 2023. This shows that there’s a massive disparity between how much Arm is worth compared to how much money it actually makes.

This massive valuation might be somewhat warranted if the company was growing rapidly. But, again, revenue grew at a very modest 14% last quarter. So, I’m not quite sure why investors are pricing in such absurd earnings potential for Arm stock. Who knows…maybe they know something I don’t?

As usual, please be sure to do your own due diligence before making any investments. Or, if you think I’m dead wrong on this, feel free to comment your thoughts below. You can even visit me at my blog Do Not Save Money and let me know why I’m wrong on my analysis for Arm stock. 

I hope that you’ve found this article valuable for learning whether or not you should buy ARM stock. To learn more, please subscribe below to get alerted of new articles from InvestmentU.