After a strong earnings report on last Wednesday, accompanied with a weak forecast for the full fiscal year, the British chip designer Arm (NASDAQ: ARM), which licenses its chip designs and earns funds through royalties, decided to enter a brand new market. Arm is expanding into the data-center market, where it’s looking to build its own chips and launch them sometime next year, which will immensely impact ARM stock.
This would allow the company to power new AI models and reduce reliance on the GPU market leader and dominant supplier, Nvidia (NASDAQ: NVDA). This is an extremely bold move, attempting to take on the market leader while other Nvidia competitors, like Advanced Micro Devices (NASDAQ: AMD) and Intel (NASDAQ: INTC), are still struggling to gain market share against the giant. However, Arm seems insistent on building its own chips, and this move is part of Masayoshi Son’s, the CEO of Softbank Group (OTCMKTS: SOBKY), $64 billion bet to transform the group into a sprawling AI powerhouse.
ARM Expands into Data Centers
U.K.-based Arm will set up an AI chip division, which will aim to build a prototype by the spring of 2025 and the mass production for this prototype, which is to be handled by contract manufacturers, will be expected to start in the fall of that year. SoftBank is already negotiating with Taiwan Semiconductor Manufacturing Corporation (NYSE: TSM), which also happens to be Nvidia’s main supplier, looking to secure production capacity.
Moreover, Arm, in which SoftBank owns a 90% stake, will handle initial development costs, which are expected to reach hundreds of billions of yen, with SoftBank also contributing. Also, there’s a possibility that once a mass-production system is established, the AI chip business could be spun off and placed under SoftBank, as they aim to expand to data centers, robots, and power generation under Son’s AI revolution vision.
He also envisions bringing together the latest AI, semiconductor and robotics technologies to spur innovation in various industries, with AI chips that can process large volumes of data at the core of that project. As a result, he traveled across the world to realize that vision. He visited chip hubs in Taiwan and the U.S. and also met with executives of companies expected to cooperate with SoftBank’s initiative.
Additionally, he has set sights on artificial general intelligence (AGI), which is expected to assist humans in many different areas like shipping, pharmaceuticals, finance, manufacturing and logistics. Many investors know that the market for AI chips is expected to see accelerated growth, and this claim can be backed up by numbers, as this market is estimated to be worth $30 billion this year, and it is expected to exceed $100 billion in 2029 and top $200 billion in 2032, according to Precedence Research of Canada.
Nvidia currently leads the field, but with the massive demand for its AI chips, it’s sometimes unable to keep up with the growing demand, and its chips are almost always sold out, according to people in the industry. Therefore, there’s an opportunity for other chip companies, and Softbank clearly sees that. It’s not like Arm is a completely new player in the sector. In fact, the company already supplies circuit designs called architecture to Nvidia and other chip developers. On top of that, Arm holds an over 90% share in architecture for processors used in smartphones. Therefore, the company has already established itself in a position of continuous growth moving forward.
ARM vs. Nvidia
In a recent interview, Arm CEO said that the company is the one who already provides the architecture to Nvidia’s Blackwell chips, which could mean that Arm will be capable of producing chips that are similar to Blackwell, and this could pose a potential threat to Nvidia’s dominance in AI chip manufacturing, especially since Nvidia itself said that Blackwell will be the most powerful chip for AI.
Moreover, Arm CEO Rene Haas said during the recent earnings call: “From cloud to edge, all AI software models, from GPT to Llama, rely and run on the Arm compute platform,” adding that “as these models become larger and smarter, their requirements for more compute with greater power efficiency can only be realized through Arm.” With that being said, Arm’s existence as a company is essential for all these tech giants as it is the main supplier of the technology required to run these sophisticated AI software models.
Arm’s Market Position Supports Huge Growth
When Arm released their quarterly earnings, the stock dipped thanks to weak guidance, but it recovered and now trades at $116.65. If you look at the average price target Wall Street has for the stock, you’d see that it’s $111.37, representing around a 4.5% downside from where the stock is currently trading, which proves Wall Street analysts wrong.
Moreover, analysts expect Arm to grow by 20% on average from fiscal 2025 to 2027, but growing top and bottom line by 20% year over year consistently is a very hard thing to achieve, but given how dominant Arm is in the field, and how there’s still a lot of potential for AI growth, Arm could really grow at these rates. Of course, investors are skeptical in the short-term, thanks to the disappointing guidance that missed analysts’ expectations. However, there’s a lot going on for Arm that could translate into a better future for the company.
For instance, the company said that growth will be driven by its unique ecosystem of software and design partners, and Arm currently has the world’s largest compute ecosystem with more than 18 million software developers. In addition, Arm and Intel Foundry Services announced a multigenerational collaboration to enable chip designers to develop advanced Arm-based SoCs to be manufactured at Intel Foundry, initially for mobile and data centers and potentially for automotive applications.
This is great news for investors, as the mobile and data center markets are great, but the automotive industry is something else. This is an industry that’s expected to reach 3.9 trillion by 2030, so there’s a lot of opportunities for Arm there. Also, the company said that cloud service providers, like Microsoft (NASDAQ: MSFT), are continuing to shift to Arm-based chips, and we’ve seen when these companies reported earnings that they plan to keep spending on chips from different companies like Arm, Nvidia, and AMD, even though some of them make their own chips, which indicates the strong demand that’s not expected to slow down anytime soon.
Arm is still collecting royalties on products developed in the 1990s, and when you take a look at the markets that the company is in, you’d see that it keeps gaining market share, and that the value of these markets has been increasing over time. The company is also highly profitable, with a gross profit margin of 97.2% and an operating profit margin of 42.1% this quarter.
ARM Stock Forecast
If Arm can continue to grow its market share in rapidly growing markets, then it has a strong growth potential in the long-term. If you’re wondering whether to buy ARM stock right now or not, you might want to wait until Nvidia reports earnings next week, because this will be the make or event for the entire semiconductor and AI markets.
Some might say that ARM stock is a bit overvalued right now, but given the company’s dominant position in the market, the premium could be justified, just like how Nvidia’s premium is. Therefore, the focus should be on how the business performs, and Arm continues to grow at a high rate.
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