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Artificial intelligence (AI) has the potential to disrupt various technology applications, with semiconductors being a crucial component of the AI landscape. High-performance graphics processing units (GPUs) play a significant role in generative AI, machine learning, and quantum computing.
Two companies at the forefront of the AI semiconductor industry are Nvidia and Advanced Micro Devices. Both companies have established leading positions in the market, and the demand for their chips is exceptionally high.
Nvidia stock has experienced substantial growth over the past year, causing some investors to worry that they may have missed the opportunity to invest. For those seeking lesser-known options, Arm Holdings may be of interest. The company went public last year and has been overshadowed by other opportunities in the semiconductor space.
However, Arm Holdings recently exceeded Wall Street’s expectations during its earnings call for its fiscal third quarter, ended Dec. 31. Following the earnings report, Arm’s stock nearly doubled over the next three trading days, prompting investors to consider whether the stock is a viable investment at its current price.
It’s important to note that the semiconductor industry is cyclical, with demand for chips fluctuating due to various factors such as supply chain challenges and geopolitical concerns. Despite this, Arm Holdings has experienced significant growth due to the current high demand for chips.
In the last quarter, Arm reported revenue of $824 million, a 14% increase year over year, surpassing Wall Street’s consensus estimate. Additionally, the company reported adjusted earnings per share (EPS) of $0.29, outperforming analyst estimates.
The company’s guidance for the current quarter indicates expected sales between $850 million and $900 million, well above analyst estimates. This positive outlook has contributed to a significant increase in Arm’s market cap since the earnings report.
However, the company’s valuation relative to its underlying results and peers suggests that the stock may be overvalued. While Arm Holdings may be a viable long-term investment, the current price may be inflated due to short-term trading momentum.
Investors interested in the semiconductor space may consider Arm Holdings as a potential option, but caution is advised due to the stock’s inflated price. Monitoring the company’s performance and management’s execution is recommended before making an investment decision.
Adam Spatacco has positions in Nvidia, while The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.
In conclusion, while Arm Holdings may offer potential as a long-term investment, the current valuation suggests a level of risk associated with the stock. Therefore, investors should carefully evaluate the company’s performance and market conditions before considering an investment in Arm Holdings.
