Arm Holdings plc: More than one trick up its sleeve

Arm Holdings' valuation doubled in three days from $75 to $150 billion after the chipmaker announced a $160 million increase in its sales estimate for 2024.

Artificial intelligence boom or not, does $160 million in additional sales justify a sudden $75 billion valuation bonus? Short-sellers tempted to give a definitive answer to this question may have forgotten to ponder the wisdom of Keynes, who reminded us how markets can remain irrational longer than investors can remain solvent...

The extraordinary leap in Arm Holdings' market capitalization undoubtedly owes as much to the mania for artificial intelligence as to the extremely small number of shares in circulation. Softbank controls nine-tenths of the capital, a quarter of which via the Vision Fund - managed by Softbank, but with money from Saudi and Emirati sovereign wealth funds in the first instance.

The Cambridge-based chipmaker relies on a highly lucrative, royalty-based business model, as its technology is embedded in virtually every cell phone. But this market has reached a ceiling in recent years, so that before the rise of AI, growth opportunities appeared limited.

It would be useful to point out that, at the time of the company's - very partial - IPO, set at Masayoshi Son's share price of around $50 billion, there was quite a bit of sarcasm. Some said the businessman was taking his dreams for granted.

It's true that the valuation demanded by Son was lower than the one at which the Vision Fund had acquired his shares on behalf of the Gulf sovereign wealth funds. Both Softbank and the Gulf sovereign wealth funds must be praying that the stock's meteoric rise will continue! If that's the case, there's a good chance they'll dump their shares en masse as soon as their lock-up period expires in mid-March...

In any case, Son's IPO makes us forget the WeWork disaster, which cost Softbank $16 billion. His poker move with the dribbling IPO of Arm Holdings proves that he has more than one trick up his sleeve. On the other hand, those who praise his visionary talents would be well advised to remember that the Japanese missed out on the gain of a lifetime when he liquidated his $3 billion position in Nvidia in 2019...