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

Last Updated February 12, 2024 12:43 PM
Giuseppe Ciccomascolo
Last Updated February 12, 2024 12:43 PM

Key Takeaways

  • Arm surpassed analyst expectations for profit in the last quarter.
  • The company’s blueprints will be used by chipmakers, expecting a 15% boost in revenue.
  • Supermicro is a new player to watch in the artificial intelligence (AI) server space.

Arm showcased  solid results on February 7, 2024, but it was the company’s strategic partnerships that truly stole the spotlight. The chip designer joined forces with tech titans like Nvidia and Microsoft, sending its stock skyrocketing. Meanwhile, California newcomer Supermicro is making waves with its eco-friendly artificial intelligence (AI) servers, doubling its share price in record time.

Are they the next big thing , or is this just another tech bubble waiting to burst?

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).

Arm stock price performance
Arm stock price increased after latest results I Source: Google Finance

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%.

Non-GAAP operating expenses for the fourth quarter may hover around $490 million, culminating in a full-year total of approximately $1.7 billion. Meanwhile, the non-GAAP EPS for the fourth quarter is estimated to range between $0.28 and $0.32, with the full-year EPS falling between $1.20 and $1.24.

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.

Arm outlook
Arm outlook is positive I Source: Bloomberg

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.

Supermicro latest figures
Supermicro latest figures I Source: Bloomberg Terminal

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.

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