John Thackray, Wikipedia

ARM’S AI PIXIE DUST

Last September, Déjà Partners shared our reservations about the long-term value of Arm, the British chip designer, as it debuted on the Nasdaq with a valuation that raised eyebrows...

Fast forward to today, Arm’s share price has not just grown—it has skyrocketed, soaring over 50% in the last couple of days and doubling the company’s market capitalisation since its IPO, now valued at a staggering $120 billion.

Arm’s remarkable journey over the last six months, from a $54 billion valuation at $51 per share to over $122 per share, is driven by a surge in demand for artificial intelligence technology alongside a recovery in smartphone sales. The company, foundational to 99% of global mobile processors, has seen its revenues climb 14% year-on-year to $824m in the final quarter, prompting upward revisions in revenue and profit forecasts. As of the February 14th close, investors are valuing Arm at 106 times forward earnings. That compares with a forward price-earnings ratio of 33 for Nvidia!

 

Arm’s increasing valuation is closely linked to its role in the AI ecosystem, especially as it expands its reach from conventional sectors like mobile devices to offering its technology for AI functions on edge devices. With license revenues reaching a remarkable $384m in its last quarter, exceeding expectations, this transition is evident. The financial community has started comparing Arm’s growth potential to Nvidia’s success in the sector. 

While the figures are undoubtedly impressive, Déjà Partners remains cautious about the long-term sustainability of such rapid growth. Utilising the Gartner Hype Cycle as a reference, it’s possible to speculate that Arm’s current market standing might be reaching the ‘Peak of Inflated Expectations’. The AI Pixie Dust has undoubtedly fuelled Arm’s valuation and it will be interesting to observe how Arm can continue to defy the laws of gravity!

Thanks for reading.

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