Nvidia’s Investment in Arm Holdings: A $280 Million Bet on AI Growth
Nvidia (NASDAQ: NVDA) first revealed its stake in semiconductor firm Arm Holdings (NASDAQ: ARM) during the fourth quarter of 2023. Initially valued at $147 million, the investment has now soared to over $280 million, making up about 65% of Nvidia’s $433 million stock portfolio.
Stock Rise Driven by Artificial Intelligence Buzz
It’s important to note that Nvidia hasn’t increased its stake in Arm this year. Instead, Arm’s shares have jumped over 150% in the past 12 months, fueled by anticipation of its role in the artificial intelligence (AI) landscape. As the leading semiconductor company globally, Nvidia’s backing carries considerable weight in investor circles.
Wall Street also holds a positive outlook on Arm. Of the 41 analysts monitoring the company, the median target price is set at $160 per share, suggesting an 18% increase from its current price of $136. However, only about half of these analysts give Arm a buy rating.
Arm’s Growing Influence in Semiconductor Markets
Unlike traditional semiconductor firms, Arm focuses on developing CPU architectures and licensing its technology to other companies. This model allows giants like Apple, Amazon, and Microsoft to incorporate Arm-based chips in various devices, from smartphones to data centers.
Arm’s innovation extends to compute subsystems, which combine its CPU designs with additional elements needed by engineers for chip development. Additionally, it offers software tools that support application development for its chips, including resources for AI and machine learning. Historically, Arm has dominated the smartphone sector, with its chips found in 99% of devices. Recently, the company has improved chip performance, allowing it to penetrate PC and data center markets, which have been primarily led by Intel and AMD.
For instance, Apple has transitioned its MacBooks to Arm processors. CEO Rene Haas predicts that Arm will capture 50% of the Windows PC market by 2029, up from about 11% today. Additionally, ten of the world’s largest cloud providers now utilize Arm CPUs, leading to a six-point increase in Arm’s cloud market share to 15% over the past three years.
Image source: Getty Images.
Arm’s Valuation: Is It Too High?
In its recent fiscal 2025 Q2 report ending September 30, Arm exceeded its sales guidance, with revenues rising 5% to $844 million, driven by increased royalty income. However, licensing revenue dipped, attributed to fluctuations in agreement timing and size. Non-GAAP net income also fell by 17% to $0.30 per diluted share.
Looking ahead, Arm stands to benefit significantly from the AI boom. Its licensing model allows companies to save on research and development costs while enabling the development of tailored silicon solutions. Unlike Intel and AMD, Arm provides this level of flexibility. This advantage is likely to continue driving Arm’s market share gains across various segments.
Despite this, analysts forecast Arm’s adjusted earnings will grow at a remarkable 33% annually until fiscal 2026, which ends in March 2026. At a valuation of 100 times adjusted earnings, Arm’s shares may seem pricey, but not excessively so. I believe that risk-tolerant investors might consider acquiring a small stake now, though better opportunities may arise in the future.
Should You Invest $1,000 in Arm Holdings Today?
Before committing to a purchase of Arm Holdings stock, it’s wise to reflect:
The Motley Fool Stock Advisor team recently highlighted what they believe are the 10 best stocks to buy now—and Arm Holdings did not make the list. The stocks selected have potential for significant returns in the years ahead.
For perspective, had Nvidia been part of this list when it was featured on April 15, 2005, an investment of $1,000 would have ballooned to $899,361*!
Stock Advisor offers a straightforward approach to investment success, featuring portfolio guidance, ongoing analyst updates, and two stock recommendations each month. Since its inception in 2002, the service has outperformed the S&P 500 by more than four times*.
See the 10 stocks »
*Stock Advisor returns as of November 11, 2024
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, serves on The Motley Fool’s board. Trevor Jennewine holds shares in Amazon and Nvidia. The Motley Fool also has positions in and recommends Amazon, Apple, Microsoft, and Nvidia, and advises on various options. A full disclosure policy is maintained.
The views and opinions expressed herein are solely those of the author and do not reflect those of Nasdaq, Inc.
