Since its IPO, Arm Holdings (NASDAQ:ARM) shares have declined by 12%. This raises the question of whether it is an attractive entry point to build a position in this artificial intelligence (AI) play.
Background
Considered the biggest IPO of the year, shares of ARM Holdings began trading on the Nasdaq stock exchange on 14 September.
The company has also previously traded publicly, before being acquired by SoftBank in 2016.
There was a lot of hype around the share offering, with many seeing huge potential going forward. Just ask Nvidia, one of the largest companies in the world. It tried to buy Arm Holdings last year, but ultimately failed due to regulatory issues.
Valuation
Upon the IPO, Arm Holdings was initially valued at over $60bn. It has since pulled back closer to $54bn.
Even after this fall in market capitalisation, this is pretty lofty for a company with only $2.66bn of revenue and $404m of profit in the past 12 months.
For me, this is too expensive, especially when I take into account the year-on-year growth it has experienced over the same period. Revenue and earnings declined by 2.5% and 53.3% respectively.
Its prospects in AI
Traditionally, this British chipmaker is focused on developing and designing computer processing units (CPUs).
It is very successful in this field. So much so, that you will find its architecture in 99% of smartphones around the world. This makes Arm Holdings a very important company.
It’s not just focused on smartphones though. It has a strong foothold in the automotive sector with a 41% market share.
However, a lot of the optimism around Arm Holdings comes from its prospects in the world of AI, as opposed to its established business.
This arises from the expectation of rapid growth in cloud computing. Companies such as Nvidia employ Arm Holdings architecture to make data processing units (DPUs). DPUs are described as a new class of programmable processor that improves the performance of applications for AI and machine learning.
Scepticism
After researching Arm Holdings though, I don’t believe it’s as involved in the AI world as it’s made out to be. It’s more involved as a supplier to other companies in the AI space.
It seems like prominent tech investor, Cathie Wood, agrees with me. She stated on CNBC’s Squawk Box Europe that there “might be a little bit too much emphasis on AI” with respect to Arm Holdings.
As a result of the misunderstood role it plays in the AI world, I believe it’s valued sky-high like Nvidia. However, Arm Holdings isn’t experiencing the same level of growth.
In fact, if you look at overall revenue, growth has flatlined.
Therefore, I am planning on staying far away from Arm Holdings shares for the time being.
