(Bloomberg) — Arm Holdings Plc is the most expensive stock among artificial intelligence hardware makers, despite trading nearly 30% below its peak. Wednesday’s earnings will need to offer bullish signals to justify that valuation.
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The semiconductor designer, whose share price has more than doubled since its September initial public offering, may struggle to generate the kind of excitement that sent its stock soaring in February after a bumper revenue forecast — especially in an earnings season in which investors have been hard to impress.
“People should temper their expectations as far as how well this will act with a positive result,” said Jay Woods, chief global strategist at Freedom Capital Markets.
The options market is implying an 12% move in either direction for Arm shares following results, according to data compiled by Bloomberg. The stock, which is down as much as 2.1% on Wednesday, jumped 48% the day after earnings in February.
This earnings season has been good for AI-related companies able to show that their investments in computing gear will pay off. But investors have been quick to punish others, with Meta Platforms Inc. spooking equity markets last month when it revealed large AI spending plans, amid doubts over its revenue streams.
Super Micro Computer Inc. also saw its shares fall after reporting quarterly sales that fell just short of estimates.
Read More: AI Hardware Stocks Get Pummeled Even as Big Tech Keeps Spending
That suggests Arm will have to give results and forecasts that far surpass Wall Street estimates for the stock to avoid a similar fate. The company is expected to report sales of $879.2 million in the fourth quarter, up 39% from the same period a year ago, according to data compiled by Bloomberg. Adjusted earnings are expected to be 30 cents per share, compared with break-even a year ago.
At 27 times sales projected over the next 12 months, Arm is more expensive than any stock in the Nasdaq 100. That includes Nvidia Corp., the biggest beneficiary of demand for AI computing hardware that’s seen its shares jump more than 500% since the end of 2022.
Michael Sansoterra, chief investment officer at Silvant Capital Management LLC, is betting that Arm can meet the hype. The high valuation is being exacerbated by the limited number of shares available to trade as a result of Softbank Group Corp.’s roughly 90% stake, according to Sansoterra.
“It is an expensive stock, but it’s also a stock that’s expanding into new markets and growing quickly,” he said in an interview. “Anytime they get bought or sold, you’re going to see a slightly higher volatility in the shares because of that smaller float.”
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(Adds Wednesday trading in fourth paragraph.)
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