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According to a shareholder letter, Arm is well positioned to benefit from the AI boom, and is offering its services to big players.
Shares of Softbank-owned chip designer Arm Holdings Plc (NASDAQ: ARM) jumped 48% on Thursday after the company recorded impressive earnings that beat expectations and announced a strong profit projection for the ongoing quarter, owing to AI demand.
Arm’s projection for the current quarter is 28 cents to 32 cents in earnings per share and sales of between $850 million and $900 million. This is higher than analysts’ projections of 21 cents per share and $780 million in sales.
Arm’s market valuation gained $38 billion from the jump in stock value. Since Arm is owned by SoftBank, which controls 90% of the chip designer (about 930 million shares), SoftBank made more than $34 billion of the increase. On Wednesday, CNBC reported that in after-hours trading, Arm shares had increased by 41%, and Arm’s earnings from the jump was $16 billion. The report also notes that the company’s stake rose to $87.4 billion from $71.6 billion.
Arm Stock Rises From Earnings on AI Boom
A recent shareholder letter from Chief Executive Officer (CEO) Rene Haas and Chief Financial Officer Jason Child notes a few growth drivers, including royalty revenue and artificial intelligence (AI). The letter reads:
“We are seeing the demand for Arm technology to enable AI everywhere, from the cloud to edge devices in your hand,” noted the letter. “The most demanding AI applications are already running on Arm today.”
The letter also explains that the growth of AI is creating more opportunities for Arm because of the demand on scarce design resources. It adds that Arm already has the largest compute ecosystem in the world, with over 15 million software developers in design.
“As more applications move to AI, we are investing in the software ecosystem needed to bring AI to the billions of Arm-based devices,” the management wrote.
The shareholder letter also adds that several products from big players already use Arm chips or deploy software on Arm-based devices. Notable names include Google, Vivo, Xiaomi, HP, Dell, and Lenovo.
Unfortunately, SoftBank cannot cash out its earnings from the spike in Arm stock. SoftBank is currently under a lock-up provision restricting the company from selling its shares until 180 days after Arm’s stock market debut. Since the company went public in September, the lock-up period will not end until March.
Arm Regained Losses from Investing in WeWork
Interestingly, SoftBank’s windfall has now exceeded the company’s heavy losses from investing in co-working space provider WeWork Inc (NYSE: WE). In the second quarter of 2023, SoftBank’s Vision Fund venture arm announced a $6.2 billion loss from several investments, including WeWork. By November, SoftBank said its cumulative WeWork loss was over $14 billion.
Last November, WeWork filed for Chapter 11 bankruptcy in NewJersey federal court after its valuation dropped to $50 million from $47 billion in 2019. The company also said its liabilities at the time were between $10 billion and $50 billion. The loss Vision Fund took caused SoftBank to announce in 2022 that it would shift into “defense” mode, abandoning its strategy of aggressive investments. However, SoftBank CEO Masayoshi Son said last August that the company will leave “defense mode” and switch to “offense mode.” Son said SoftBank was ready because “we have built our cash on hand to five trillion yen,” about $35.3 billion at the time.
