Nvidia Allocates Over Half of Its Portfolio Towards a Single Remarkable Artificial Intelligence (AI) Shares
Nvidia ( NVDA -1.22% ) initially revealed a stake in semiconductor firm Arm Holdings ( ARM -1.52% ) in the last quarter of 2023. At the time, the position was valued at $147 million. However, a recently submitted Form 13F indicates that the value of the position has surged beyond $280 million, accounting for approximately 65% of Nvidia's total stock portfolio worth $433 million.
It's essential to clarify that Nvidia has not expanded its investment in Arm this year. Instead, the shares have witnessed a significant surge due to anticipations that the company will prosper from the realm of artificial intelligence (AI). In fact, the stock has climbed over 150% within the past 12 months. Nevertheless, Nvidia seems to foresee further growth, which could influence investors' perspectives. As the most esteemed semiconductor company globally, Nvidia boasts extensive expertise in manufacturing chips.
Interestingly, Wall Street shares a positive outlook on Arm's performance as well. Among the 41 analysts monitoring Arm, the median predicted price for the stock stands at $160 per share, indicating a potential 18% rise from its current value of $136. However, only about half of these analysts assign a 'buy' rating to Arm's stock.
In conclusion, investors are confronted with a predicament. On one hand, Arm has been strengthening its position in critical semiconductor sectors, and its growth could be substantiated as AI infrastructure demand surges. On the other hand, Arm's stock appears to be overvalued at its current market price. To obtain a more comprehensive overview, continue reading.
Arm is fortifying its position in key semiconductor areas
Arm is a semiconductor company that doesn't produce semiconductors. Instead, it designs central processing unit (CPU) architectures and sells the intellectual property (IP) to other corporations. Renowned entities like Apple, Amazon, and Microsoft utilize Arm-based chips in their products, ranging from mobile devices and laptops to data center servers and industrial sensors.
Arm has also launched compute sub-systems, which incorporate its CPU designs with essential components required for chip development in data center servers, mobile devices, and personal computers (PCs). Additionally, Arm offers software development tools, enabling programmers to construct applications for its chips, including AI and machine learning code libraries.
Significantly, Arm has long dominated the mobile market with its energy-efficient architectures. In fact, Arm processors are integrated into 99% of smartphones. However, the company has recently demonstrated improvements in chip performance, helping it gain ground in PCs and data centers, territories previously dominated by Intel and AMD.
Indeed, Apple has already switched its MacBooks to Arm processors, with CEO Rene Haas predicting a 50% share in Windows PCs by 2029, rising from its current share of about 11%. Besides, 10 of the world's leading hyperscale cloud companies utilize Arm-based CPUs in their data centers. As a result, Arm's market share in cloud computing has grown by 6 percentage points, reaching 15% in the past three years.
Arm's stock is trading at a relatively high valuation
Despite surpassing its forecasts in the second quarter of its 2025 fiscal year, which concluded on September 30th, Arm's overall financial performance was underwhelming. Total sales increased by 5% to $844 million, driven by robust growth in royalty revenue, yet offset by a dip in licensing revenue, which management attributed to "usual fluctuations in timing and size" of agreements. Moreover, non-GAAP net income declined by 17% to $0.30 per diluted share.
Looking ahead, Arm could emerge as a significant beneficiary of the AI boom. Its licensing-based business model enables customers to delegate a portion of chip-related research and development (R&D) expenses while providing flexibility to create custom silicon tailored to their unique needs. Neither Intel nor AMD can provide the same degree of flexibility. Consequently, Arm has been gaining ground across various semiconductor segments, and there's no reason to believe that trend will abate.
However, Wall Street anticipates Arm's adjusted earnings to surge by 33% per annum through its 2026 fiscal year, which ends in March 2026. This current valuation of 100 times adjusted earnings might seem expensive, but not unreasonably so. Personally, I consider risk-tolerant investors comfortable with volatility could consider purchasing a modest position today. Nonetheless, I believe more compelling buying opportunities will present themselves in the future.
Nvidia's increased investment in Arm Holdings, as indicated by the Form 13F filings, has significantly boosted the value of its position, now worth over $280 million and making up approximately 65% of Nvidia's total stock portfolio. This growth in investment is largely due to anticipations that Arm will prosper in the field of artificial intelligence.
In light of Arm's strong position in key semiconductor areas and its potential growth in the AI boom, some investors may view Arm's stock as a valuable investment opportunity, despite its relatively high valuation at 100 times adjusted earnings.
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