Arm Holdings Plc finds itself on a challenging path as its elevated valuation is scrutinized in the wake of recent market apprehensions. Despite outperforming many peers in the semiconductor sector, the company’s steep valuation continues to draw attention from investors, particularly in light of concerns sparked by DeepSeek regarding AI-related expenditure.
Arm, a leading designer of semiconductor chips used across various industries including smartphones and data centers, is at a pivotal moment. Investors are keenly awaiting its earnings announcement, scheduled for later today, hoping to gauge its financial health amid ongoing volatility in AI infrastructure investments. Paul Marino from Themes ETFs highlights Arm’s robust positioning in sectors like autonomous driving and mobile technology, suggesting potential growth despite high valuations.
The semiconductor sector is experiencing mixed sentiments, partially due to DeepSeek’s impact, which has simultaneously shaken investor confidence and spurred optimism about rapid AI advancements. Companies like Arm, along with Qualcomm, stand to potentially gain from increased spending on AI-driven edge devices, such as phones. However, deep-seated anxieties persist regarding the future profitability of major AI beneficiaries.
The Philadelphia Stock Exchange Semiconductor Index has recorded a 7% decline since last week, heavily influenced by Nvidia’s significant 17% share drop. Alphabet’s disappointing cloud revenue figures have contributed to a cautious outlook on AI investments. Despite this, large tech players remain committed, with Alphabet announcing unexpectedly high capital expenditure plans, indicating continued investment in AI technologies.
Arm’s stock, though not at its July peak, has increased over 30% this year, gaining 1.7% recently. Yet, it remains the highest-valued chip company, trading at 83 times projected earnings, far exceeding Nvidia’s valuation. This discrepancy raises questions about Arm’s ability to sustain growth, with expectations of net earnings slowing from 176% this fiscal year to 64% next year and 43% thereafter.
Analysts like Dan Morgan of Synovus Trust express skepticism about Arm’s lofty valuation, citing uncertain boosts in demand for smartphones and PCs due to AI innovations. While some analysts, such as those at Rosenblatt Securities, maintain a positive outlook due to rising selling prices, others hold a cautious stance, given Arm’s recent mixed earnings performance and concerns about its smartphone market.
Overall, fewer than 60% of analysts recommend buying Arm’s stock—a relatively low endorsement for a major tech company. This hesitancy stems from diminishing earnings projections and revenue expectations, compounded by Arm’s performance being 10% above the average analyst price target.
As Arm prepares to release its earnings report, the central question remains whether it can justify its high valuation amidst mixed market sentiments and fluctuating AI investment landscapes. Investors and analysts will be closely watching for signs of sustained growth and strategic adaptability in this rapidly evolving sector.
