2024.02.13 02:45
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Tripled in three days! Arm is being speculated as the "second Nvidia"?

Currently, Arm's P/E ratio has reached three times that of Nvidia's, yet investors continue to chase higher short-term call options. Analysis suggests that the extremely small float is a key driver behind the soaring stock price, with only about 5% of Arm shares available in the market.

On Monday, Arm's stock price surged again by 29%, with an intraday increase of over 40%. The daily trading volume was more than ten times the average volume of the past three months, reaching a historic high. In just three trading days since Arm announced its earnings report on February 7th, the stock price has risen by over 90%.

Last week, the company projected that its revenue for the fourth quarter of the 2024 fiscal year (24Q1) would reach $850 million to $900 million, far exceeding the average analyst expectation of $778 million. Arm's CEO, Rene Haas, stated that the opportunities brought by AI are still in the "early stages".

Recently, Arm's strong performance in the stock market has been closely related to NVIDIA, and there is a faint perception among investors that it could be the "second NVIDIA". So, can Arm's stock price continue to soar like NVIDIA?

"Second NVIDIA"? AI brings opportunities, but Arm is not NVIDIA

Analysts believe that although the strong demand for AI may significantly boost Arm's revenue and profit, it is unlikely for Arm to achieve triple-digit revenue growth like NVIDIA and AMD, as most of its business is concentrated in the slower-growing smartphone market.

From a valuation perspective, Arm seems to be much more expensive than NVIDIA. According to LSEG data, despite analysts significantly raising profit expectations last week, Arm's expected P/E ratio remains as high as 99 times after Monday's surge.

In comparison, in June last year, NVIDIA's expected P/E ratio reached 84, but due to the speed at which analysts raised profit expectations outpacing the rise in the company's stock price, the P/E ratio quickly declined. Currently, NVIDIA's expected P/E ratio is around 34. In comparison, Arm's P/E ratio is about three times that of NVIDIA.

Furthermore, in terms of the float, unlike NVIDIA, only a small portion of Arm's stocks are available for trading. After the IPO, SoftBank retained 90.6% of Arm's shares. According to LSEG data, the top 10 shareholders of Arm control nearly 95% of the company's shares. In contrast, the top ten shareholders of NVIDIA own about one-third of the company's shares.

Analysts suggest that the scarcity of tradable Arm stocks may also be one of the reasons for the recent surge in the stock price.

It is worth mentioning that Arm had the opportunity to be acquired by NVIDIA before. In September 2020, NVIDIA planned to acquire Arm for $40 billion, but eventually, both parties abandoned the merger plan. From the beginning, this merger plan faced strong opposition from various parties, with Arm's founders and customers showing disdain for the plan, and regulatory agencies announcing strict scrutiny of the merger plan.

Options Market Highlights AI Frenzy: Investors Continue to Chase Short-Term Call Options

Since its initial public offering in September last year, Arm's market value has risen by over 130%. Currently, the company's market value has reached a record-breaking $152.7 billion.

According to Ihor Dusaniwsky, the Managing Director of Predictive Analytics at S3 Partners, who tracks short sellers, there are 10.5 million shares of Arm, worth approximately $1.4 billion, being shorted by bearish traders. However, Dusaniwsky stated that there is no evidence to suggest that short covering was the main driver behind Monday's surge in Arm's stock price:

"Although there has been some short covering, the main reason for the stock price increase is still the buying pressure from the bulls."

Furthermore, looking at the options market, there is an expectation that this upward trend may continue, as investors continue to chase short-term call options. Currently, the most actively traded options are the $185 call options expiring on Friday, with a trading volume of over 54,000 contracts and a last traded price of approximately $6 per contract.

Based on Arm's closing price of $148.97 on Monday, the stock price would need to rise by an additional 28% by Friday's close for these options to be profitable at expiration.