ARM Soars But Analyst Skeptical Over Valuation

ARM has seen its share price soar thanks to upbeat earnings results, growing interest in AI and its successful partnership with Nvidia. However, NVDA has yet to report its earnings, with some analysts concerned that ARM's price surge may not reflect the company's valuation. Can momentum be sustained pending Nvdia's upcoming earnings on February 21?

Just How High

Arm Holdings' shares have nearly doubled since reporting earnings just one week ago on February 7, with analysts pointing to the company's guidance as the primary justification for increased investor interest. The share price rose 42% in a single day, defying expectations of financial gravity. Currently trading at a PE ratio of 1,655, with a market capitalisation of £153.2 billion, after reporting only £159 million in pre-tax income. The company's elevated share price occurs alongside a general surge in AI-focused stocks ahead of NNDA's expected earnings announcement on February 21.

ARM has become one of the most popular AI-oriented stocks on the market after debuting at an initial public offering (IPO) price of £51 per share last September, rocketing upwards to close at £149 per share on Monday. This meteoric rise validates the decision to pursue public listing last year despite the already elevated valuation and prevailing risk aversion at that time. Analysts had doubts about the company's focus on licencing central processing unit (CPU) designs for smartphones. However, this perception has evolved with premium smartphones now universally incorporating AI capabilities. This has helped Arm increase its royalties as it expands into cloud servers and the automotive sector.​

Where the Atmosphere Ends

Analyst price targets for Arm have not kept pace with the stock's recent surge. Despite the narrative shifting towards favouring Arm's licencing model, average analyst price targets currently stand at $93 per share, representing a 39% discount to the stock's prevailing price. This is despite analysts raising targets following Arm's strong earnings report. Some even caution that the share price increase may be exaggerated, given that SoftBank owns 90% of Arm's stock, with just 10% available to the public market. Following the announcement of the results, trading volumes exceeded 100 million shares, equivalent to around 10% of Arm's available float. This compares to a daily average of 8.4 million shares traded two months before the earnings release.

Even against a backdrop of significant gains across the AI sector, which has led some market participants to draw parallels with the tech bubble of the late 1990s, Arm's share price appreciation has been exceptionally rapid without corresponding increases in reported earnings. Some analysts worry that certain investors may overestimate Arm's ability to expand in the future. While its designs have powered strong smartphone growth, Arm faces intensifying competition as established technology firms like AMD and Intel increasingly focus on AI. However, partnerships such as Nvidia's reported collaboration with Arm to enter the PC market may provide additional avenues for growth.​

Heading Towards Gap?

ARM's share price has declined significantly from its all-time high of 164. Waning momentum suggests the stock may retreat further, retesting the gap high of 94, unless the round support of 100 is maintained. So long as ARM remains above the 80 swing and the gap low of 77, volatility will likely persist with an upward bias. Should buying momentum reemerge, investor attention could return to 140 and a potential retest of the record peak.​

Source: SpreadEx / ARM Holdings

Key Takeaways

Arm Holdings has seen its share price nearly double in the past week following strong earnings results. But its surge has outpaced increases in its earnings and profits, raising concerns that investors may be overly optimistic. While Arm's chip designs have powered growth in smartphones, it faces intensifying competition. The recent gains also come amid a broader rise in AI-focused stocks ahead of Nvidia's earnings announcement. Analyst price targets for Arm have not kept up with the stock's surge, suggesting an exaggeration given that SoftBank owns 90% of its shares. Arm's future growth will depend on expanding beyond smartphones and capitalising on the shift to AI across more industries.