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Not everyone is buying the hype of AI darling Arm, which has suddenly become Wall Street’s favorite stock

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Fueled by speculation about a potential AI boom, semiconductor manufacturer Arm Holdings is the hottest stock on Wall Street right now—and on a historic tear. 

After smashing its earnings estimates last week, investors have sent the British chipmaker’s share price soaring: It spiked 50% last Friday, and then climbed another 30% on Monday. Arm’s stock peaked at $149, just over double its pre-earnings value of $74. 

Recent reports have cast Arm as the “next Nvidia,” poised to reap huge profits from its fledgling AI business. But beneath the surface, some industry insiders don’t believe the hype. They say Arm’s fundamentals and lack of any proven AI revenue don’t justify the run—and that more likely, fleeting AI hype and the stock’s unusual trading dynamics are to blame.

“I have no idea what’s going on,” said Needham and Co. analyst Charles Shi. “I don’t think the fundamentals are moving up as fast as price at this point. The valuation has been very rich—probably richer than what I would consider to be the best semiconductor companies … It’s definitely a head-scratcher for me.”

Cambridge, England-based Arm Holdings got its start designing semiconductor chips back in 1990, competing with the likes of Nvidia and Advanced Micro Devices. It designs chips that are then manufactured and utilized by other tech companies, including Apple, Samsung, and Qualcomm. Today, Arm designs high-end chips for all manner of devices, from computers to smartphones and automobiles—and now, AI, according to its latest earnings call. 

Arm only went public five months ago, but it smashed investors’ earnings expectations last quarter, reporting $850 million in revenue. And the real eye-grabber was its AI business, which it isolated as a key growth area. 

“We are also seeing strong momentum and tailwinds from all things AI,” said Arm CEO Rene Haas in an investor call. “[With] AI needing energy efficient compute and compute subsystems, we feel very, very strongly positioned for growth.”

But garden-variety licensing and royalty revenues, not AI, were what was actually behind Arm’s big earnings release. 

Arm makes most of its money from fees paid by the computer, smartphone, and car companies that use its chips in their products. Arm reported big gains in those revenues last quarter, primarily out of its China division. The company reported signing 1 billion new licensing contracts last September; in an average month, it only reports a quarter of that, according to Shi. 

Arm didn’t specify where that growth was coming from, but it could be because of backlogs that concentrated a lot of its dealmaking in that month.

While AI could potentially open up new marketing channels for Arm to license its chips, analysts say it’s too soon to draw any conclusions—despite what the stock price might lead you to believe.

“In the press, there’s a lot of talk about AI—how [Arm] is an AI company now,” Shi said. “Nobody has confused Arm as an AI company on the institutional side. It’s the consensus that they have very little exposure to AI.”

Arm’s unusual trading dynamics could be to blame for the stock’s massive spike. Of the 1 billion listed shares, 90% are locked up by Masayoshi Son’s SoftBank. (That big bet has put Son in a great position: SoftBank made more than $16 billion in unrealized gains off of Arm’s run.) But the fact that only 10% of Arm shares are actually trading at any given time means that the price is far more susceptible to swings.

“For last Thursday, Friday, and on Monday this week, almost every day, [100 million shares] exchanged hands. The volume is that high,” Shi said. “I actually have no idea what’s behind that trading volume. Some people think it’s shorts covering [their positions].”

Because the market’s so shallow, a small number of frenzied retail investors pouring in to buy up a relatively very small quantity of trading stock (and then collecting their gains quickly) would have an outsized impact on the share price. Should SoftBank try to sell off even some of its shares, it’s possible that existing demand wouldn’t be able to keep the price up. 

Short positions could also be to blame, according to Shi. Arm stock dipped after it missed its previous earnings release last fall, and some investors might have bet against the stock last week, expecting another slow quarter. But the unexpected boom would have forced them to buy back their positions at a loss, sending the share price up even more—an upward force that won’t stick around long-term.

“We’re still in that price discovery process,” said Shi.

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