We Witness Wealthy Individuals Endorsing This Soaring AI Shared Ownership. Worth the Investment?
Artificial intelligence has been the main force driving the stock market for the past two years.
The debut of generative AI, starting with ChatGPT, has been the key factor fueling the bull market and the ongoing shift towards tech stocks. Nvidia has capitalized on this AI surge to become the most valuable company worldwide.
The expansion of AI and the success of AI stocks have drawn in numerous billionaire investors, and one specific AI stock has become a popular choice among billionaires and hedge fund managers during the third quarter, according to recent 13-F filings. This is Arm Holdings (ARM 2.64%), renowned for licensing its energy-efficient CPU architecture for smartphones and other applications. The company's unique business model sees it generate revenue through licensing fees and then making most of its income from royalties once the products with those chips begin selling.
Several billionaires invested in Arm during the third quarter:
- Stanley Druckenmiller's Duquesne Family Office initiated a new position in Arm, purchasing 21,610 shares worth approximately $3 million at the end of the quarter.
- Ken Griffin's Citadel Advisers significantly increased its Arm position, adding 416,567 shares to its total holdings, bringing its ownership to 457,372 shares of Arm worth about $65.4 million. Citadel first bought the stock in Q3 2023 when Arm went public.
- Renaissance Technologies, the hedge fund founded by billionaire Jim Simons, bought 396,300 Arm shares during the quarter, raising its total to 1,070,000, or $153 million. Renaissance first bought the stock in Q1 2024.
Additionally, Arm has the backing of several high-profile investors:
- Softbank, the Japanese holding company controlled by billionaire Masayoshi Son, continues to hold 90% of Arm after taking the company private in 2016.
- Nvidia, which tried to acquire Arm in 2020, now owns 1.96 million shares of Arm, obtained in Q4 2023. These shares were worth $280.4 million at the end of Q4.
- Alphabet, the parent company of Google, is also an investor in Arm, having bought the same number of shares as Nvidia in Q3 2023.
Why billionaires are investing in Arm
Nvidia has been the standout performer in the AI boom and the best way to gain exposure to the new technology. Not only has the stock skyrocketed, but its revenue has skyrocketed for five consecutive quarters, demonstrating that demand for Nvidia's chips is growing rapidly.
The next best stock to own in the sector is up for debate, but Arm seems to be emerging as the winner. The company maintains close ties with Nvidia. Arm's architecture is used in the Grace Blackwell Superchip, and Arm's strength in energy-efficient CPU technology is seen as critical for data center chips because AI data centers consume vast amounts of energy. Meanwhile, the company is continuing to grow in its core smartphone segment as chip prices rise and licenses for its latest CPU architecture, the Armv9, increase in popularity.
During the third quarter, the stock plummeted in July, in sync with a broader sell-off in AI stocks, and rebounded somewhat in August and September, despite finishing the quarter lower than it started.
Is Arm Holdings stock a good investment?
Arm has experienced a decline over the past week, in unison with a broader decline in tech stocks as some investors worry that valuations are excessively high, particularly in AI companies.
Indeed, Arm is expensive. It currently trades at a price-to-sales ratio of 39, and a price-to-earnings ratio around 100.
However, the company boasts significant competitive advantages. Its energy-efficient architecture virtually ensures that it will retain over 99% of the smartphone market's market share for the foreseeable future, and an attractive position in the data center market and other applications where preserving battery power is crucial, such as wearable devices.
With the recent pullback in the stock, investors may have the opportunity to buy at a lower price if they are patient. But in the long run, Arm appears to be a solid investment as the AI revolution unfolds. Investors should also keep in mind that it has a robust pipeline of revenue coming in from recent licensing deals.
- Given the success of Nvidia in the AI boom and the increasing demand for energy-efficient CPU technology in data centers, many billionaires and hedge fund managers are investing in Arm Holdings, considering it as one of the best stocks to gain exposure to the sector.
- With its energy-efficient architecture and strong position in the smartphone market, Arm Holdings is currently trading at high valuations but still holds significant competitive advantages, making it a potential long-term investment as the AI revolution continues to unfold.
