Amazon, appleand Nvidia is one of the largest, wealthiest, and most powerful technology companies on the planet.
It’s hard to properly emphasize how dependent these companies are on arm holdings (arm +2.50%) It uses a unique instruction set architecture. They literally can’t build chips without an Arm license, and they can’t do that without leaving the ecosystem they’ve spent years digging deep into.
As artificial intelligence (AI) gains momentum and new technologies such as humanoid robotics are on the horizon, Arm has become an indispensable technology company. Additionally, Arm just announced a revolutionary move that could completely change the business over the next 5-10 years.
Here’s why growth stocks can soar over the long term.
Image source: Motley Fool.
First of all, the big announcement of skinny on arm
Language is at the heart of human interaction, and surprisingly, the same holds true for technology. Arm is a leader in the development of instruction set architectures (ISAs) that enable computer processors to communicate with and execute software.
The central processing unit (CPU) acts as the brain of almost all computers and electronic devices. Arm specializes in CPU architectures, and until recently the company made all its money from the royalties and license fees it charges customers for making chips with its designs.
But now Arm is actually in the same market as its customers. The company recently announced its first production chip, a CPU designed to manage agent AI workloads in data centers. Arm’s CEO pointed out that agent AI has quadrupled CPU demand.
Making such a big decision on something new is always risky, but clearly Arm felt the opportunity was worth it. Management expects AGI CPUs to enter mass production later this year, and expects chip revenue to reach $1 billion by 2028 and $15 billion by 2031.
Why tech giants need Arm
Arm has been careful to label its AGI CPUs as an addition to the AI market rather than a direct competitor to customers. This doesn’t mean Arm’s entry into the chip space won’t alienate Amazon, Apple, and Nvidia, all of which license Arm’s ISA for their most important chips. This includes:
- Graviton CPUs used by Amazon for its AWS cloud computing platform
- The Apple Silicon processor that runs most iOS devices
- Grace and Vera CPUs used by Nvidia in its data center AI stack
However, Arm has a lot of influence here. For example, if Apple developed a chip with a different ISA, it could experience critical functionality problems. Apple will have to redo all of its operating system software to align with the new ISA, as will Apple’s entire third-party developer base. That seems pretty unrealistic considering there are already many devices in circulation.
Today’s changes
(2.50%) $3.79
current price
$155.07
Key data points
Market capitalization
$165 billion
daily range
$152.30 – $158.37
52 week range
$80.00 – $183.16
volume
23K
average volume
6.9 million
gross profit
94.84%
This is a big problem, but investors can overcome it
Unfortunately, Arm stock is very expensive. A recent price-to-earnings ratio of 200 can be breathtaking for a variety of reasons. Arm’s high valuation makes sense, given the company’s deep core business and impressive growth prospects.
But this comes at a steep price, especially if AGI CPUs won’t have a significant impact on your business for years to come. Analysts currently expect earnings to grow by an average of 29% per year over the long term. I think these estimates could rise as the market digests the potential of Arm’s new CPUs, but probably not enough to make the stock a bargain at this price.
Arm’s stock price has fallen since its peak late last year. Shares soared on the chip announcement, but have since given back some of that gain and could continue to fall if the recently volatile stock market continues to lose momentum.
It’s impossible to know exactly when Arm will bottom, so if the stock continues to struggle, consider dollar-cost averaging and buy slowly. By doing so, investors can accumulate shares in this world-class company at a more favorable price and, hopefully, enjoy the success of soaring stock prices for years to come.
