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Arm shares soar as AI-fueled boom brightens growth prospects

FILE PHOTO: Softbank’s Arm, chip design firm holds IPO at Nasdaq Market site in New York

By Samrhitha A

(Reuters) -Arm Holdings shares surged more than 55% on Thursday, on track for their best day since a blockbuster market debut in September, powered by strong forecasts on demand for its technology to design chips for artificial intelligence features.

The surge would put the British chip designer's market value at more than $100 billion as investors gobble up the stock as another way to bet on AI. The rally represents a dramatic turnaround from its first month as a public company in late 2023 when shares sank.

Executives said on Wednesday customers were flocking to Arm-based central processors to complement Nvidia's chips for AI work in data centers, and it was working on new laptops and smartphones that can handle chatbots and other AI features.

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Arm's technology is not directly used in the AI work, but companies like Nvidia are choosing it for central processing units that complement their AI-specific chips.

"Arm is riding on the coattails of demand for Nvidia's technology, particularly its datacentre systems," said Susannah Streeter, head of money and markets at Hargreaves Lansdown.

Arm is key to the chipmaking space, as it sells blueprints and other intellectual property to create computing chips that power most of the world's mobile phones, including Apple. The stock lost as much as 26% of its value within a month of its Sept. 14 debut, but it has surged nearly 90% since then to $120.80 on Thursday.

"The market is starting to have a better handle on their business model and how that aligns with some of the bigger chip design trends over the next few years," said analyst Ben Bajarin from Creative Strategies.

Reuters previously reported that Nvidia, Arm and Qualcomm are all angling to enter the laptop business to challenge Apple. In most of those cases, the chip companies are likely to use their own technology to power AI features but plan to license technology from Arm to complete the chips.

"I know there is some skepticism over the value but I think people are starting to understand how deeply intertwined Arm IP is to much of the growth sector of the industry."

IPO LOCKUP ENDS IN MARCH

The IPO lockup period, which prohibits company insiders from selling the stock, is due to expire on March 12, likely boosting the supply of shares. Currently, only 9.5% of Arm's outstanding shares are publicly traded, making them susceptible to sharp moves.

"Today's ginormous jump in valuation is an indication that investors are not fearing the end of the IPO lockup. Sentiment indicates that any post-lockup sales could be well absorbed by the market," said Michael Ashley Schulman, chief investment officer at Running Point Capital.

The midpoints of Arm's fourth-quarter sales and adjusted profit forecasts range of $875 million and 30 cents per share, respectively, beat LSEG estimates.

Japan's SoftBank Group, which currently holds a 90% stake in the company, remains bullish on the company's prospects, Arm CEO Rene Haas told CNBC on Thursday.

Investors also cheered Arm's success in diversifying its business. Smartphones now represent 35% of overall units shipped, versus between 60% and 70% in 2016.

Its model of creating and licensing semiconductor designs rather than manufacturing chips meant Arm was able to grow fast without employing a lot of capital, said Russ Mould, investment director at AJ Bell.

"These attributes still exist and are now being supercharged by AI ... that is reflected in the substantially higher royalty and licensing revenue being reported by the company," Mould added.

Arm trades at 56.46 times its 12-month forward earnings estimates, versus investor darling Nvidia's 32.66 and Advanced Micro Devices' 43.61.

(Reporting by Samrhitha Arunasalam and Medha Singh in Bengaluru; additional reporting by Stephen Nellis; Editing by David Gaffen, Shounak Dasgupta and Sriraj Kalluvila)