Arm Holdings Gains Momentum as Investors Seek the “Next Nvidia”

Arm Holdings, a leading designer of central processing unit (CPU) architectures, has emerged as a potential investment opportunity for those seeking the “next Nvidia” in the artificial intelligence (AI) industry. With Nvidia’s market capitalization nearing $3 trillion, investors are turning their attention to Arm, whose stock has more than doubled since its initial public offering in September 2023.

Arm’s business model revolves around licensing its intellectual property (IP) to other companies, which utilize it to develop custom chips. The company also provides development tools and services to streamline product engineering. Its revenue is generated through licensing fees and pre-chip royalty fees, making it well-positioned to benefit from the adoption of its IP in popular products like iPhones.

While historically known for its power-efficient architecture, Arm has been gaining market share in both consumer electronics and cloud computing. In the last two years, its market share in cloud computing CPUs has risen to 15%, while its market share in consumer electronics CPUs has reached 30%. Notably, Arm-based processors have found their way into products from tech giants such as Apple, Microsoft, Amazon Web Services, Google Cloud, and Meta Platforms.

Arm’s dominance in mobile devices, where it holds a 99% market share in smartphones, positions the company to benefit from the increasing demand for edge AI. Edge AI refers to AI workloads processed on end-user devices like smartphones and PCs, reducing application lag time. Arm’s chips are already widely used in smartphones and are gaining popularity in PCs, with CEO Rene Haas projecting a potential market share of over 50% in Windows PCs within five years.

Despite its growth prospects, Arm’s stock trades at a relatively expensive valuation compared to its projected future earnings growth. Wall Street expects Arm to achieve a 29% annual growth in adjusted earnings through fiscal 2027, while Morgan Stanley presents base-case and bull-case scenarios with earnings growth rates of 46% and 69% annually, respectively. However, other analysts hold a more pessimistic view, with a median price target of $125 per share, implying a 3% downside from its current share price of $129.