Arm's frenzied stock rally continues as AI chase trumps valuation

By Emily Bary

Arm's explosive stock performance 'has the look and feel of a retail investor chase,' analyst says, with valuation falling to the wayside

Shares of Nvidia Corp.(NVDA) are up 240% over the past year and shares of Super Micro Computer Inc. (SMCI) are ahead 760%. With moves like that, investors seem eager to get in on whatever could be the next blowout play on the artificial-intelligence trend.

And judging by the explosive moves in Arm Holdings PLC's stock (ARM) over recent days, Wall Street may have pegged the chip designer as that next big winner. The stock gained 29% in Monday's session and has nearly doubled since the company posted earnings after last Wednesday's closing bell.

While Arm's latest results and guidance were "very impressive," in the view of Mizuho desk-based analyst Jordan Klein, they don't explain a rally of this magnitude.

See more on earnings: Arm's stock explodes 50% higher as company proves itself an early AI winner

Rather, the recent action in Arm shares has "has the look and feel of a retail-investor chase," Klein told MarketWatch in an email, as investors see Arm as "a way bigger play on AI" than they had previously, and as they rush to get in on the action.

The semiconductor sector in general has seen "money coming in from all over" lately as investors seek out the "next key enabler for AI," he continued.

Earnings expectations for Arm have come up in the wake of the latest report, and analysts tracked by FactSet now model $1.49 in adjusted earnings per share for fiscal 2025, which ends next March. That compares with a consensus estimate of $1.36 as of late January.

But Arm's stock price has seen a far bigger increase, such that Arm shares now trade at 100 times estimated fiscal 2025 earnings per share.

"Now you have valuation being ignored," Klein told MarketWatch. Plus, Arm has minimal float, he noted, as Softbank owns 90% of shares.

See also: Arm's stock surge burns short sellers Thursday, to the tune of $445 million in paper losses

-Emily Bary

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02-12-24 2012ET

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