Smack bang in the middle of Nvidia’s annus mirabilis, in August 2023, the fabless chipmaking titan beat Wall Street's second-quarter revenue estimates by a cool $4 billion.
It felt like a true inflection point for the Silicon Valley darling; an encapsulation of the role Nvidia’s high-spec GPUs played – and continue to play – in the artificial intelligence revolution.
This was just the first of numerous supersized revenue beats for Nvidia, with another multibillion-dollar quarterly beat dropping in November.
Wall Street went parabolic on these numbers, doubling Nvidia’s share price multiple times over and bringing it into the excluding trillion-dollar market capitalisation club.
Nvidia ascent
Nvidia’s astounding ascent, however, has set a shockingly high precedent for its contemporaries to follow. This is where British semiconductor designer Arm Holdings PLC (NASDAQ:ARM) comes in.
Arm posted record revenues of $928 million in the fourth quarter, up 47% year on year, easily beating previous guidance of between $850 million and $900 million. Full-year revenues increased 21% to $3.23 billion.
Granted this was not in the same ballpark as Nvidia’s 10-figure thumping beats, but a beat nonetheless.
Yet Arm shares subsequently sank 8% in post-market trading. A lot of this had to do with Arm’s forward guidance, which was, to use technical parlance, a bit meh.
Full-year sales projections are set between $3.8 billion and $4.1 billion, with a midpoint of $3.95 billion, just shy of the consensus estimate of $3.99 billion.
Below consensus
Chief finance officer Jason Child said he “wanted to make sure we set a target that ties to what we have high confidence into what we can deliver”.
This seems reasonable enough, but the market evidently was hoping for something bigger to justify Arm’s excessive valuation - around 64 times forward earnings going by Thursday’s share price.
Herein lies the conundrum for Arm. Since going public in September 2023, its valuation has nearly doubled on the back of a fever-pitch frenzy around AI.
Arm evidently needs to pull off Nvidia-style miracles to sustain this lofty valuation.
Nvidia was able to do it. But while Arm operates in similar circles, the two are fundamentally different businesses.
It’s becoming less clear how much AI can really bring to Arm’s table, especially since its technology is primarily used in smartphones as opposed to the cutting-edge data centres where Nvidia chips can be found.
Genuine uplift
Russ Mould, investment director at AJ Bell, said that Arm “is seeing a genuine uplift in revenue from AI-driven demand – with its V9 chip designs licensed for use in smartphones and data centres and artificial intelligence chips used in large language models”.
But is it enough to sustain a $110 billion market valuation at huge earnings multiples? Perhaps not, if recent market reactions are anything to go by.
However, “what looks like a relative dose of conservatism on Arm’s part may pay off over time – any short-term pain will be worth it if it helps reinforce the company’s credibility and earns it a reputation for under-promising and over-delivering”, said Mould.
In the meantime, Arm and other chipmakers may struggle to justify the lofty valuations bequeathed to them.
Nvidia has spoiled us for too long.