Arm’s post-earnings pop leaves stock trading at over 100% premium to Nvidia
The logo of semiconductor design firm Arm on a chip.
Jakub Porzycki | Nurphoto | Getty Images
Exactly two years ago, Nvidia’s attempt to purchase chip designer Arm from SoftBank came to an end due to “significant regulatory challenges.”
Masayoshi Son, SoftBank’s billionaire founder, has never been so lucky.
That agreement would have involved selling Arm for $40 billion, or just $8 billion more than SoftBank paid in 2016. Instead, Arm went public last year, and the company is now worth over $116 billion after the stock soared 48% on Thursday.
SoftBank still owns roughly 90% of the outstanding stock, meaning its stake in Arm increased by over $34 billion in a day.
But the rally is somewhat confounding when looking at how the market values Arm. Wall Street may start to get a clearer sense of how much investors are willing to pay next month, when the 180-day lockup period expires and SoftBank will have its first opportunity to sell.
Chipmakers Nvidia and AMD have been Wall Street darlings of late due to their central position in the artificial intelligence boom. Nvidia makes the bulk of the processors used for cutting-edge AI models like those that power ChatGPT, while large tech companies have also indicated their interest in purchasing competitive chips from AMD as they hit the market.
But Arm is now being valued at a much higher earnings multiple than either of those companies. As of Thursday’s close, investors are valuing Arm at close to 90 times forward earnings. That compares to a forward price-to-earnings ratio of 33 for Nvidia and 46 for AMD, which both have significantly higher multiples than other major chip stocks like Intel and Qualcomm.
In reporting better-than-expected quarterly results on Wednesday, Arm gave investors some new data to suggest that its growth rate could persist through the next fiscal year. Arm said it was breaking into new markets thanks to AI demand, and that its primary market, smartphone technology, was recovering from a slump.
‘Gain market share’
Arm has a different business model than Nvidia and AMD in that it’s largely a technology licensing company. Arm said its royalties business, in which billions of chips manufactured each quarter result in a small fee to use the company’s architecture, was surprisingly strong. That’s because it can charge twice as much for its latest instruction set, called Arm v9, which accounted for 15% of the company’s royalties.
“Arm continues to gain market share in the growth markets of cloud servers and automotive which drive new streams of royalty growth,” the company said in its investor letter.
Arm’s revenue forecast for the current quarter points to 38% annual growth at the midpoint of the range, marking a significant acceleration from recent periods. But for Nvidia, analysts are expecting growth of over 200% for the January quarter and almost that level the next period.
AMD has been growing much slower and is expected to remain in the single digits until the back half of the year, when expansion is expected to accelerate.
Lisa Su, president and CEO of AMD, talks about the AMD EPYC processor during a keynote address at the 2019 CES in Las Vegas, Nevada, U.S., January 9, 2019.
Steve Marcus | Reuters
While Arm has some AI chip development, its technology is oriented around the central processor, or CPU. AI chips are often graphics processors, or GPUs, which use a different approach to running multiple calculations at the same time.
Still, Arm says it stands to benefit from AI chips. CEO Rene Hass mentioned Nvidia’s Grace Hopper 200 chip, which will start shipping in finished systems in April, on a call with analysts. That chip combines one of Nvidia’s GPUs — an H100 — with a CPU that uses Arm’s Neoverse design.
“The drivers and direction of travel for Arm are as outlined at the time of its IPO, but the timing and slope is sooner and steeper due to AI.” wrote Citi analyst Andrew Gardiner in a note on Thursday. “Given we are in the very early innings of AI adoption, we expect Arm’s sales trends to remain robust into FY25/26.”
The company said that its backlog of expected licensing sales rose 42% on an annual basis to $2.4 billion.
For Son and SoftBank, the fortuitous scuttling of the Nvidia-Arm deal means an opportunity for the Japanese conglomerate to directly benefit from the growth in AI and the premium that Wall Street is placing on chip companies at the center of the action.
SoftBank on Thursday said its Vision Fund investment group logged a $4 billion gain in the latest quarter, after a brutal stretch of losses from bad bets like WeWork. SoftBank said in the December quarter that it booked an investment gain of $5.5 billion thanks to the Arm IPO.
If the stock can hold at these levels or even keep going up, more gains are in store.
“Arm is the biggest contributor to the global AI evolution,” SoftBank finance chief Yoshimitsu Goto said during an earnings presentation on Thursday. He even went so far as to call SoftBank’s investment pool an “AI-centric portfolio.”
— CNBC’s Arjun Kharpal contributed to this report
Charles Liang, chief executive officer of Super Micro Computer Inc., during the Computex conference in Taipei, Taiwan, on Wednesday, June 5, 2024. The trade show runs through June 7.
Annabelle Chih | Bloomberg | Getty Images
Embattled server maker Super Micro Computer said on Monday that it’s hired BDO as its new auditor and submitted a plan to Nasdaq detailing its efforts to regain compliance with the exchange. The shares jumped 23% in extended trading.
“This is an important next step to bring our financial statements current, an effort we are pursuing with both diligence and urgency,” Super Micro CEO Charles Liang said in a statement.
Super Micro is late in filing its 2024 year-end report with the SEC, and said earlier this month that it was looking for a new accountant after its previous auditor, Ernst & Young, stepped down in October. Ernst & Young was new to the job, having just replaced Deloitte & Touche as Super Micro’s accounting firm in March 2023.
Super Micro said it told Nasdaq that it believes it will be able to file its annual report for the year ended June 30, and quarterly report for the period ended Sept. 30. The company said it will remain listed on the Nasdaq pending the exchange’s “review of the compliance plan.”
Shares of Super Micro soared more than twentyfold over a two year period from early 2022 until their peak in March of this year. But the stock has been hammered on troubling news about its compliance with Nasdaq. Once valued at about $70 billion, the company’s market cap was at $12.6 billion at the close on Monday, following a 16% rally during regular trading.
Super Micro has been one of the primary beneficiaries of the artificial intelligence boom, due to its relationship with Nvidia. Sales last fiscal year more than doubled to $15 billion.
On Monday, Super Micro announced that it was selling products featuring Nvidia’s next-generation AI chip called Blackwell. The company competes with vendors like Dell and Hewlett Packard Enterprise in packaging up Nvidia AI chips for other companies to access.
Super Micro was added to the S&P 500 in March, reflecting its rapidly growing business and then-soaring stock price. Less than two weeks after the index changes were announced, Super Micro reached its closing high of $118.81.
The troubles began within months. In August, Super Micro said it wouldn’t file its annual report with the SEC on time. Noted short seller Hindenburg Research then disclosed a short position in the company, and said in a report that it identified “fresh evidence of accounting manipulation.” The Wall Street Journal later reported that the Department of Justice was at the early stages of a probe into the company.
The month after announcing its report delay, Super Micro said it had received a notification from the Nasdaq, indicating that the delay in the filing of its annual report meant the company wasn’t in compliance with the exchange’s listing rules. Super Micro said the Nasdaq’s rules allowed the company 60 days to file its report or submit a plan to regain compliance. Based on that timeframe, the deadline was Monday.
WATCH: Super Micro is a sell due to accounting irregularities
Kelly Steckelberg attends an Evening from the Heart LA 2022 Gala hosted by the John Ritter Foundation for Aortic Health at Valley Relics Museum in Van Nuys, California, on May 5, 2022.
Araya Doheny | Getty Images
Canva, a high-valued design software startup that competes with Adobe, said Monday that it hired Kelly Steckelberg as its chief financial officer, five years after she helped take Zoom public and then guided the company through its Covid-19 pandemic surge.
Founded in 2013, Canva was valued recently at $32 billion, a drop from its peak of $40 billion in 2021.
“Kelly’s impressive track record as a strong leader and strategic thinker, combined with her proven expertise in scaling enterprise companies, make her the perfect addition to our leadership bench,” Canva said in an emailed statement.
Canva is generating about $2.5 billion in annualized revenue and boasts 220 million monthly users. The company is widely viewed as a top initial public offering candidate for venture-backed tech companies after a historically slow period for new offerings dating back to early 2022.
On Monday, ServiceTitan, which sells software for the trades, filed to list on the Nasdaq. Cerebras, a maker of artificial intelligence chips, has been on file since late September, and online lender Klarna said last week that it has confidentially filed its IPO paperwork with the U.S. Securities and Exchange Commission.
A Canva spokesperson declined to comment on the startup’s timeline for an IPO.
Steckelberg held financial positions at Cisco and was CEO of online dating company Zoosk before joining Zoom in 2017. Steckelberg is based in Austin, Texas, while Canva has its headquarters in Sydney, Australia.
Zoom went public with Steckelberg’s help in 2019. The video-chat company saw its market cap soar to upward of $160 billion in October 2020, early in the Covid-19 pandemic, as users working from home swarmed to the app. Zoom has since lost more than 85% of its value.
Steckelberg announced her departure from Zoom in August after seven years at the company. Last month, former Microsoft executive Michelle Chang replaced Steckelberg as Zoom’s CFO.
Canva’s previous finance chief Damien Singh resigned in February after the company said it was conducting an internal investigation surrounding inappropriate behavior.
ServiceTitan offices in Draper, Utah.
Google Earth
ServiceTitan, a company that sells software to contractors such as plumbers and roofers, on Monday filed to go public on the Nasdaq under the ticker symbol “TTAN.”
The filing suggests that investors could be getting more interested in next-generation software companies. Just a few, including Reddit and Rubrik, debuted on public markets in the U.S. this year, and chipmaker Cerebras filed for an initial public offering. There were basically no tech initial public offerings in 2021 or 2022 as central bankers pushed up interest rates to flight inflation, making investors less willing to bet on money-losing challengers.
Based in Glendale, California, ServiceTitan offers cloud software for advertising, scheduling jobs, dispatching, producing invoices and taking payments. It had a $35.7 million net loss on $193 million in revenue in the quarter that ended on July 31, according to the filing. Revenue was up about 24% year over year, and the quarterly loss had narrowed from almost $52 million.
ServiceTitan’s revenue growth rate will stand out for people investing in cloud stocks, who have seen rates sag with few new public companies in the sector. The average growth rate for Bessemer’s Nasdaq Emerging Cloud Index, the basis for the WisdomTree Cloud Computing Fund, is 16.6%.
The company was originally founded in 2007 by Ara Mahdessian and Vahe Kuzoyan, whose fathers were both residential contractors. While most ServiceTitan customers are small and medium-sized businesses, it has started focusing more on selling products to big companies and construction customers, according to the filing.
ServiceTitan plans to keep up to 5% of shares in the IPO for eligible clients, the founders’ friends and family members and others through a directed share program.
Investors include Battery Ventures, Bessemer Venture Partners, Iconiq and TPG. Iconiq on its own controlled 24% of the compan’s Class A shares.
Competitors include Salesforce and SAP, along with specialty companies such as HouseCall Pro, Jobber and Workwave.
Goldman Sachs, Morgan Stanley, Wells Fargo and Citigroup are among the company’s IPO underwriters.
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