How Can Arm's Soaring Valuation Continue to Rise?
$ARM Holdings Ltd(ARM)$ 's stock price soared 8.63% yesterday, hitting an all-time high!
Although Arm's moat is as strong as $NVIDIA Corp(NVDA)$ 's, and they're both benefiting from the AI trend. But Arm's price-to-sales ratio is sky-high at 55 times, even higher than Nvidia's 42 times!
How did Arm hit new highs?
With such a high valuation, how can it still hit new highs? Will the growth rate increase in the future?
According to the latest guidance, Arm's revenue is expected to be between $3.8 billion and $4.1 billion for the 2025 fiscal year. Even at the higher end, that's only a 26.8% year-on-year growth, which isn't that impressive compared to Nvidia's current 208% growth rate.
On the profitability side, Arm's gross margin is insanely high at 95.6%, surpassing even Nvidia's 76% and $Synopsys(SNPS)$ ' 83%.
But because Arm's revenue scale is smaller and their R&D investment is huge, accounting for 63% of total revenue, their net profit margin is way lower than Nvidia's.
Why is Arm still going up?
I have a few guesses:
First, Arm's float is tiny, with nearly 90% of the shares in $Softbank Group Corp(SFTBY)$ 's hands. That small float makes it easy for speculators to drive up the price, especially with the AI hype going on.
Second, Arm is going to be included in the $NASDAQ 100(NDX)$ and other key indices on June 24th. That's going to attract a ton of passive funds into Arm, which will be a huge boost for its already small float.
Third, AI is bubbling up. It's the fourth industrial revolution, and it's as big as the dot-com bubble in 2000. In this kind of environment, AI stocks are bound to get overvalued.
Target Price
So, Arm's rally is definitely beyond its fundamentals. But with all these factors aligning, Arm might just keep breaking records. Who knows how high this bubble will take valuations?
Analysts are giving Arm a target price of up to $160, but it′s already trading at $174. Many analysts have given a sell rating:
But they're still bullish on Nvidia, with a target price of around $170 for its current price of $136.
If Nvidia hits analysts' expectations of $1.2 trillion revenue by 2025, its price-to-sales ratio would be 27.5 times, still below the 33 times we saw during the semiconductor bull market in 2021.
Considering AI is just exploding now, and it's being hailed as the fourth industrial revolution, Nvidia's valuation could go even higher. Maybe it really has a chance to hit $5 trillion!
And in this ride, Arm might just keep going up until the leader shows signs of topping out. Let's see how far this bubble takes us!
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