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
Technology
OpenAI dissolves team focused on long-term AI risks, less than one year after announcing it
Boaz Weinstein, founder and chief investment officer of Saba Capital Management, during the Bloomberg Invest event in New York, US, on Wednesday, June 7, 2023.
Jeenah Moon | Bloomberg | Getty Images
Boaz Weinstein, the hedge fund investor on the winning side of JPMorgan Chase’s $6.2 billion, “London Whale” trading loss in 2011, is now taking on index fund giant BlackRock.
On Friday, Weinstein‘s Saba Capital detailed in a presentation seen by CNBC its plans to push for change at 10 closed-end BlackRock funds that trade at a significant discount to the value of their underlying assets compared to their peers. Saba says the underperformance is a direct result of BlackRock’s management.
The hedge fund wants board control at three BlackRock funds and a minority slate at seven others. It also seeks to oust BlackRock as the manager of six of those ten funds.
“In the last three years, nine of the ten funds that we’re even talking about have lost money for investors,” Weinstein said on CNBC’s “Squawk Box” earlier this week.
At the heart of Saba’s “Hey BlackRock” campaign is an argument around governance. Saba says in its presentation that BlackRock runs those closed-end funds the “exact opposite” way it expects companies to run themselves.
BlackRock “is talking out of both sides of its mouth” by doing this, Saba says. That’s cost retail investors $1.4 billion in discounts, by Saba’s math, on top of the management fees it charges.
BlackRock, Saba says in the deck, “considers itself a leader in governance, but is crushing shareholder rights.” At certain BlackRock funds, for example, if an investor doesn’t submit their vote in a shareholder meeting, their shares will automatically go to support BlackRock. Saba is suing to change that.
A BlackRock spokesperson called that assertion “very misleading” and said those funds “simply require that most shareholders vote affirmatively in favor.”
The index fund manager’s rebuttal, “Defend Your Fund,” describes Saba as an activist hedge fund seeking to “enrich itself.”
The problem and the solution
Closed-end funds have a finite number of shares. Investors who want to sell their positions have to find an interested buyer, which means they may not be able to sell at a price that reflects the value of a fund’s holdings.
In open-ended funds, by contrast, an investor can redeem its shares with the manager in exchange for cash. That’s how many index funds are structured, like those that track the S&P 500.
Saba says it has a solution. BlackRock should buy back shares from investors at the price they’re worth, not where they currently trade.
“Investors who want to come out come out, and those who want to stay will stay for a hundred years, if they want,” Weinstein told CNBC earlier this week.
Weinstein, who founded Saba in 2009, made a fortune two years later, when he noticed that a relatively obscure credit derivatives index was behaving abnormally. Saba began buying up the underlying derivatives that, unbeknownst to him, were being sold by JPMorgan’s Bruno Iksil. For a time, Saba took tremendous losses on the position, until Iksil’s bet turned sour on him, costing JPMorgan billions and netting Saba huge profits.
Saba said in its investor deck that the changes at BlackRock could take the form of a tender offer or a restructuring. The presentation noted that BlackRock previously cast its shares in support of a tender at another closed-end fund where an activist was pushing for similar change.
At the worst-performing funds relative to their peer group, Saba is seeking shareholder approval to fire the manager. In total, BlackRock wants new management at six funds, including the BlackRock California Municipal Income Trust (BFZ), the BlackRock Innovation and Growth Term Trust (BIGZ) and the BlackRock Health Sciences Term Trust (BMEZ).
“BlackRock is failing as a manager by delivering subpar performance compared to relevant benchmarks and worst-in-class corporate governance,” the deck says.
If Saba were to win shareholder approval to fire BlackRock as manager at the six funds, the newly constituted boards would then run a review process over at least six months. Saba says that in addition to offering liquidity to investors, its board nominees would push for reduced fees and for other unspecified governance fixes.
A BlackRock spokesperson told CNBC that the firm has historically taken steps to improve returns at closed-end funds when necessary.
“BlackRock’s closed-end funds welcome constructive engagement with thoughtful shareholders who act in good faith with the shared goal of enhancing long-term value for all,” the spokesperson said.
Weinstein said Saba has run similar campaigns at roughly 60 closed-end funds in the past decade but has only taken over a fund’s management twice. The hedge fund sued BlackRock last year to remove that so-called “vote-stripping provision” at certain funds and filed another lawsuit earlier this year.
BlackRock has pitched shareholders via mailings and advertisements. “Your dependable, income-paying investment,” BlackRock has told investors, is under threat from Saba.
Saba plans to host a webinar for shareholders on Monday but says BlackRock has refused to provide the shareholder list for several of the funds. The BlackRock spokesperson said that it has “always acted in accordance with all applicable laws” when providing shareholder information, and that it “never blocked Saba’s access to shareholders.”
“What we want is for shareholders, which we are the largest of but not in any way the majority, to make that $1.4 billion, which can be done at the press of a button,” Weinstein told CNBC earlier this week.
WATCH: CNBC’s full interview with Saba Capital’s Boaz Weinstein
-
Sports2 years ago‘Storybook stuff’: Inside the night Bryce Harper sent the Phillies to the World Series
-
Sports1 year agoMLB Rank 2023: Ranking baseball’s top 100 players
-
Environment12 months agoJapan and South Korea have a lot at stake in a free and open South China Sea
-
Sports1 month agoStory injured on diving stop, exits Red Sox game
-
Sports7 months agoGame 1 of WS least-watched in recorded history
-
Sports3 years ago
Team Europe easily wins 4th straight Laver Cup
-
Environment1 year agoGame-changing Lectric XPedition launched as affordable electric cargo bike
-
Environment1 year agoTesla advances Powerwall pilot project with German electric company