More Than Chips: Arm’s AI Bet Boosts Profits, Ignites Investor Frenzy

What’s The Buzz About?

Creating cutting-edge semiconductors is a collaborative effort and Arm plays a crucial role in this process, handling the initial design and licensing of blueprints, particularly for the smartphone market.

Despite challenging conditions, including economic uncertainties that dampened consumer spending, last year, Arm exceeded analysts’ profit expectations for the last quarter. Moreover, the company hinted at a resurgence in the smartphone industry, fueling investor optimism.

In the third quarter of fiscal 2023-2024 year, the British semiconductor designer delivered adjusted earnings per share of 29 cents, a notable increase from 22 cents in the previous year. Revenue also experienced a robust growth of 14%, reaching $824 million. This growth was due to the company’s expanded market share in the cloud and automotive sectors. Along with a surge in licensing revenue driven by advancements in artificial intelligence (AI).

Positive Outlook For Next Quarter

However, the real game-changer was Arm’s announcement that its blueprints would be utilized by AI-focused chipmakers. A move that may boost revenue by 15% above analysts’ forecasts to approximately $900 million. In response, investors enthusiastically rallied behind Arm , driving its stock price up by over 50%.

Variety Is The Spice Of Life

Arm earns royalties each time a chipmaker manufactures and sells a licensed design, making exclusivity unnecessary. While Arm has established strong ties in the smartphone sector, the real action is in the AI domain. Here, it has successfully cultivated partnerships with industry leaders like Nvidia and Microsoft.

While Nvidia has dominated the AI market thus far, the landscape is evolving as more companies dive into high-tech initiatives, with startups also vying for a slice of the pie.

As long as economic downturns remain at bay, consumers will invest in tech gadgets, potentially driving demand for chips. With these dynamics in play, the chip industry may face a memorable year of growth and innovation.

Another Hero In AI Space: Supermicro

Fueled by an AI server package, there’s a new California-based computer firm that is blazing ahead of the competition, with its shares already doubling in price since the beginning of the year: Super Micro Computer , also known as Supermicro.

Supermicro’s eco-conscious approach to outfitting AI data centers has propelled the company to a dominant global position in the realm of AI servers, triggering significant spikes in both its profits and share price.

Amid the frenzy surrounding AI, Supermicro’s financial performance continues to align with its soaring share price, maintaining reasonable valuations. Should its earnings meet the optimistic projections set by analysts for 2026, the company would be trading at a modest 14.5 times price-to-earnings ratio and a price-to-earnings-to-growth ratio of 0.55 times. This would be a bargain in the realm of AI stocks.

However, the rapid pace of developments in the AI landscape poses inherent risks, including heightened competition and potential declines in profit margins. Presently, Supermicro faces the pressing challenge of satisfying robust demand while expanding and enhancing its AI data center infrastructure.