Arguably the world's most important semiconductor expert is back on Wall Street, and its stock chart is never boring. Shares of Arm Holdings(NASDAQ: ARM) rose by 24.8% in November 2023, according to data from S&P Global Market Intelligence. The microchip-architecture researcher started the month with a mix of gives and takes around its own earnings report but sprung to life with the bulk of November's gains when megacustomer Nvidia(NASDAQ: NVDA) published stellar results.
Arm gets a little help from its friends
Founded way back in 1990, Arm has entered and exited the stock market a few times over the years. Most recently, the company separated from former parent company SoftBank(OTC: SFTB.Y) on Sept. 14, 2023. Thus, early November's earnings report was Arm's first business update since the initial public offering (IPO). Analysts and investors weren't sure what to expect; many financial firms were limited by lockup agreements due to their involvement in Arm's $55.5 billion IPO; and the second-quarter report didn't result in a clear-cut market reaction.
The mood changed two weeks later. Nvidia's Q3 filing exceeded every reasonable expectation thanks to tremendous interest in its artificial intelligence (AI) accelerator chips. The H100 accelerator is based on Nvidia's own chip architectures, but the upcoming Grace Hopper "superchip" promises game-changing AI performance by bundling that platform with 144 Arm-based Neoverse chip cores in a single package.
Arm's stock took flight due to Nvidia's incredible results, and now, Arm's involvement in the AI opportunity is deepening. Nvidia CEO Jensen Huang called this new solution "a new multibillion-dollar product line" in the company's earnings call.
Can this stock strong-arm its way down Wall Street?
November's surge made up for Arm's drooping chart in September. The company raised more money than expected in its IPO, which set the stock up for an early price drop. But the stock is now back to the original price and then some.
This company collects a modest royalty payment for every Arm-based processor sold. If Nvidia's Grace Hopper chips can deliver on their AI-boosting promise, Arm would be in a strong position to negotiate higher royalty rates in a future deal. And of course, Arm hopes that Nvidia sells the new chip by the boatload, allowing the technology expert to collect tons of revenue-generating royalties in the short term as well.
If nothing else, Arm's quarterly report serves as a powerful reminder of the company's high-quality client list. Nvidia may be Arm's favorite client right now, but the roster also includes tech titans Qualcomm(NASDAQ: QCOM), Alphabet(NASDAQ: GOOG)(NASDAQ: GOOGL), and Meta Platforms(NASDAQ: META), just to name a few. Arm listed freshly signed agreements with these companies and more on page 5 of the earnings release.
So Arm Holdings is in the catbird seat for processor-architecture solutions in this AI-centric era. That being said, its stock remains quite expensive, trading at 14 times book value and 21 times annualized sales. That $67.8 billion market cap can be a heavy load to carry, demanding perfect execution for years to come. Arm is certainly an important company, but I'm not comfortable with buying the stock at these lofty prices. Ask again if this red-hot market beater ever cools down significantly.
Should you invest $1,000 in Arm Holdings right now?
Before you buy stock in Arm Holdings, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now... and Arm Holdings wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.
*Stock Advisor returns as of December 7, 2023
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Anders Bylund has positions in Alphabet and Nvidia. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, Nvidia, and Qualcomm. The Motley Fool has a disclosure policy.
