Shares of Arm Holdings Surge Over 40% on the Back of Artificial Intelligence Optimism
Arm Holdings, the chip designer known for its cutting-edge technology, experienced a significant surge in its shares, soaring more than 40% on Monday. This rally comes as optimism around artificial intelligence (AI) continues to grow. The stock reached as high as $164, a staggering 42% increase from its Friday close, before settling at $139.65, up 21%.
Arm’s rapid ascent follows a quarterly outlook that surpassed expectations, cementing its position as Wall Street’s newest AI-related darling. Since its initial public offering (IPO) last September, Arm’s stock market value has nearly tripled, now reaching an all-time high of $141 billion. With this remarkable growth, around 10.5 million Arm shares worth about $1.4 billion have been sold short by traders.
However, contrary to speculation, there is no concrete evidence to suggest that Monday’s stock surge is the result of a short squeeze. Analysts attribute the primary cause of the stock’s rise to strong demand from long share buyers. According to Ihor Dusaniwsky, there has been some short covering, but it is not the driving force behind the recent rally.
The surge in Arm’s shares reflects a trend similar to that observed with Nvidia in May 2023. Nvidia witnessed sharp gains after the company highlighted how AI computing was driving massive demand for its chips. Following its impressive performance, Nvidia rose to become the fourth most valuable company on the U.S. stock market, surpassing Amazon.com.
However, unlike Nvidia, only a fraction of Arm’s shares are available for trading. Following the IPO, its owner Softbank maintained a 90.6% stake in the company. Furthermore, the chip designer’s top 10 shareholders hold almost 95% of its shares, resulting in limited availability for public trading. This scarcity in the supply of Arm shares is believed to have contributed to the recent surge in the stock’s value. In contrast, Nvidia’s top 10 shareholders own approximately a third of the company.
On March 12, Softbank will have the opportunity to sell a portion of its stake in Arm, as lock-up restrictions from the IPO end. This potential sale by Softbank could impact the stock’s trajectory in the coming weeks.
Despite Arm’s impressive momentum, it is worth noting that the company is currently trading at 99 times its expected earnings. This valuation, which some deem to be high, is a result of analysts significantly raising their earnings estimates last week. In comparison, Nvidia’s forward price to earnings ratio (PE) briefly reached 84 last June before moderating to its current valuation of 34 times expected earnings.
As the AI industry continues to expand, Arm Holdings stands at a pivotal position, driving technological innovation through its advanced chip designs. Investors and industry experts will be closely following the company’s performance and the impact of Softbank’s potential stake sale on its future growth prospects.
Analyst comment
Positive news: The surge in Arm Holdings’ shares reflects strong demand from long share buyers and optimism around artificial intelligence (AI). Arm’s impressive performance and position in the AI industry make it an attractive investment. However, there is limited supply of Arm shares, which has contributed to the recent surge. The upcoming opportunity for Softbank to sell a portion of its stake could impact the stock’s trajectory. Analysts will closely monitor Arm’s performance and the effects of Softbank’s potential stake sale on its future growth prospects.