The artificial intelligence (AI) arms race is about to enter an important new chapter. Arm, a U.K. chipmaker, is getting ready to launch its initial public offering (IPO). This stands to be one of the year’s biggest trading debuts. And, while many investors are watching closely for the Arm IPO, the new ARM stock could pose a threat to one of the tech sector’s most dominant firms: Nvidia (NASDAQ:NVDA).
Nvidia has benefitted from the AI boom like no other company, riding it all the way to a trillion-dollar market capitalization. But if Arm makes a splash with its debut and starts trading well, it could cut into Nvidia’s market share, pushing NVDA stock down in the process.
Demand for the products these companies make isn’t going anywhere. Still, strong competition from the other side of the Atlantic could definitely pose a threat to dominant U.S. chipmakers like Nvidia.
What Does the ARM IPO Mean for NVDA Stock?
There’s no question that Nvidia is a leader among U.S. semiconductor producers. It trades well above many competitors, reaping the benefits of supplying the chips behind ChatGPT, for example. Over the past six months, NVDA stock has surged around 120%. When the company reports earnings on Aug. 23, Wall Street analysts expect shares to surge even more. So, NVDA stock is poised for further growth, at least in the short term.
Investors should be more focused on the longer-term picture, however. Specifically, they should be concerned with what the market presence of a new chipmaker with reach to rival Nvidia could mean for U.S. chip firms. NVDA stock has held its own against domestic rivals as U.S. companies have doubled down on chip production. But Arm poses a unique threat that shouldn’t be underestimated. And it’s going to begin trading with a high valuation of around $64 billion.
As Barron’s reports:
“That would be a hefty valuation for a company that generated $2.68 billion of revenue in its most recent fiscal year and net income of $524 million, implying a price-to-earnings ratio of around 122 times […] It would suggest Arm is hoping to be valued more like Nvidia than other rivals.”
Granted, there are some key differences between these two chipmakers. Nvidia produces graphics-processing units (GPUs) while Arm focuses more on licensing designs for central processing units (CPUs). Additionally, Arm is “heavily exposed to the smartphone market” while Nvidia’s chips are primarily used in things like gaming and crypto mining. The company has also found a lucrative niche in helping power data centers.
This lack of direct overlap could allow the two companies to somewhat coexist. One analyst has speculated that Arm looks more like Qualcomm (NASDAQ:QCOM) than Nvidia. That doesn’t necessarily bode well for ARM stock, either; QCOM stock has struggled a bit this year despite the AI boom bolstering tech stocks.
Why It Matters
Even as momentum builds for the Arm IPO, there are still reasons to approach the debut with caution. The company is primarily owned by Japanese holding company SoftBank (OTCMKT:SFTBY), whose shares are struggling today. That said, SFTBY’s performance could be due more so to negative market momentum and is not necessarily connected to Arm. NVDA stock is also down today but is likely to rise again after reporting earnings tomorrow.
Investors may be tempted to turn to ARM stock for new AI exposure once it begins trading. While that may raise some doubts about Nvidia, it doesn’t necessarily mean that the two stocks can’t both rise on growing chip demand.
On the date of publication, Samuel O’Brient did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
