To The Moon

• Arm $ARM Holdings Ltd(ARM)$ is a company that designs CPU cores based on the ARM architecture, which follows RISC principles. It operates under a fabless model, focusing on design and licensing its technology to other manufacturers rather than producing the chips itself.

• The Arm stock closed at USD136.67 yesterday, only 8.26% lower than its all-time high of USD148.97. It appears poised to surpass its all-time high soon.

• Arm has suddenly become one of Wall Street’s favorite stocks due to the AI frenzy.

Upside Catalysts:

1) More Companies Shifting to ARM Architecture:

• Arm is gaining market share as many companies are transitioning to ARM architecture instead of Intel’s x86 architecture, due to its superior energy and cost efficiency.

• Notable companies like Amazon, Microsoft, Oracle, Google, and Nvidia are utilizing ARM architecture to design their data center CPU chips.

2) Higher License and Royalty Fees:

• Arm is charging higher royalty fees, with the v9 product garnering roughly twice the royalty rate of the equivalent v8 product.

• Arm may also consider transitioning from its current user-based license model to a time-based license model, similar to Software as a Service (SaaS).

3) AI Compute Driving Momentum:

• CEO Rene Haas said that AI cannot run without ARM.

• Prospects in AI PCs and AI smartphones are expected to drive Arm’s revenue.

• Nvidia's Blackwell and Rubin GPU platform will combines Nvidia GPUs and Arm-based CPUs. Therefore, Arm's stock price may likely move in tandem with Nvidia's stock as Arm's investors will associate the success of Nvidia's AI platform with Arm's technology.

Key Risks:

1) Expensive Valuation

• The PE and forward PE ratios are 441x and 61x, respectively.

• However, Arm’s premium valuation could be justified if its earnings continue to significantly exceed expectations. Arm is expected to announce earnings on August 6.

   

2) Low Float Risk:

• In my previous article, I highlighted that the biggest risk to AMR stock is the expiry of the IPO lockup period on March 12th. Arm, which is nearly 88% owned by Japan’s SoftBank Group, may face a severe decline even with a small sale by SoftBank.

• However, SoftBank was noncommittal about the company’s plans for its Arm stake.

• A stock with a low float, meaning fewer shares available to trade, tends to be more volatile. For example, I also often find there is a 0.2% bid-ask spread during trading hours.

Technical Analysis:

• In February, I mentioned that the risk-reward ratio for Arm may not have been justified after it reached its all-time high, equivalent to 300% of its Fibonacci extension level.

• Since then, Arm stock crashed the next day, falling 42% from mid-February to mid-April, and has rebounded by 57% since mid-April.

• I reckon it may continue to challenge its 50% and 61.8% Fibonacci Extension Levels at USD144.34 and USD158.20, respectively, based on the current share price momentum.

• Other significant resistance levels include USD177.95, USD203.09, and USD235.05. Support levels are USD130.48, USD113.32, and USD85.59.

Source: Tiger Brokers PC App

Conclusion:

• I am constructive on Arm as I reckon the AI-fueled growth is not over yet. However, I am uncertain about how much AI optimism investors have frontloaded onto the share price.

• Therefore, investors should carefully manage their position sizing in Arm. It should be considered a high-risk growth stock, possibly unsuitable for most investors, and ideally account for less than 5% in one’s aggressive portfolio.

• Arm’s valuation is tricky as analysts grapple with estimating the total addressable market, market share gain, earnings growth, and margin expansion.

• According to Bloomberg analysts, the consensus 12-month target price is USD 114.90, indicating a potential downside of -15.9% relative to yesterday's closing price of USD 136.67.

• I view Arm as one of the best AI software companies. While many investors are currently focused on finding and investing in AI software application companies like CrowdStrike $CrowdStrike Holdings, Inc.(CRWD)$ , Palantir $Palantir Technologies Inc.(PLTR)$ , Salesforce $Salesforce.com(CRM)$ , and Adobe $Adobe(ADBE)$ , they should instead consider companies like Arm. Unlike the mentioned companies that develop AI software applications, Arm specializes in designing AI chips. These chips are critical components for running AI applications efficiently. Thus, investing in a company that provides the foundational technology for AI, such as AI chips, could be a smart move, as these components are essential for the overall AI ecosystem.