To The Moon

Arm( $ARM Holdings Ltd(ARM)$ ) stock has surged by 93.44% over the past three trading days, reaching a current price of USD148.97, nearly triple its IPO price of USD51 per share.

The rally can be attributed to its recent earnings call, which highlighted the following factors:

• Better-than-expected earnings for 3Q2024, primarily fueled by Artificial Intelligence (AI) demand..

• Forecasted EPS for 4Q2024 to range between 28 cents and 32 cents, compared to the expected 21 cents, and sales projected to be between $850 million and $900 million, exceeding the anticipated $780 million.

• Arm announced the possibility of doubling charges for its latest instruction set, which contributes 15% of the company's royalties.

Will SoftBank Sell its ARM stake?

• Arm is still 90.6% owned by Japan’s SoftBank Group, while the IPO lockup period is due to expire on March 12. Thus, many investors are speculating that SoftBank will sell some stake in ARM after the IPO lockup period.

• ETFs generally require that a company float 10% or more of the shares to be eligible for inclusion. Thus, if Softbank were to sell some shares to increase to more than 10% float could be a good long-term catalyst.

• SoftBank acquired ARM for USD32 billion in 2016, and its current market cap stands at USD153 billion, which is a whopping 3.78x gain if SoftBank is able to sell at the current share price of USD148.97.

• Its PE ratio is expensive at 585x.

• SoftBank may be inclined to sell some shares after the lockup period as SoftBank previously was not able to list more than 10% of ARM’s float due to muted demand and valuation.

Technical Analysis:

Conclusion:

• I reckon that the current valuation may not be sustainable, as meeting the high earnings growth expectations set by analysts may prove challenging.

• As of now, every ARM investor is worried about the IPO lockup period expiring on March 12, and hence, I expect the rally may be short-lived.

• However, we are prepared to be pleasantly surprised by further share price upside driven by investors' desperate hunt for the next Nvidia.

• All in all, chasing the current price is deemed too risky. We still prefer investing in the Magnificent Seven, TSMC( $Taiwan Semiconductor Manufacturing(TSM)$ ), AMD( $Advanced Micro Devices(AMD)$ ), SMH ETF, or SOXX ETF to gain exposure to the AI revolution.

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