Artificial intelligence has been the dominant trend in the stock market over the last two years.
The emergence of generative AI, which began with the launch of ChatGPT, has been the primary driver of the bull market and fed the ongoing rotation to tech stocks. Nvidia has ridden this AI wave to become the most valuable company in the world.
The growth in AI and the success of AI stocks have attracted a range of billionaire investors to the sector, and one AI stock in particular emerged as a popular pick among billionaires and hedge fund managers in the third quarter, according to recently released 13-F filings. That's Arm Holdings (ARM -2.02%), which is known for licensing its power-efficient CPU architecture for smartphones and other applications. The company has a unique business model as it earns money on licenses and then makes most of its revenue from royalties once the products with those chips start selling.
Several billionaires bought Arm stock in the third quarter:
- Stanley Druckenmiller's Duquesne Family Office, which started a new position in Arm, bought 21,610 shares in the quarter, worth roughly $3 million at the end of the period.
- Ken Griffin's Citadel Advisers made a significant addition to its Arm position, adding 416,567 shares to bring its total ownership to 457,372 shares of Arm, or roughly $65.4 million worth of Arm stock. 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 in the quarter, bringing its total to 1,070,000, or $153 million. Renaissance first bought the stock in Q1 2024.
In addition to those buys in the third quarter, Arm also enjoys backing from a number of high-profile investors.
- Softbank, the Japanese holding company run by billionaire Masayoshi Son, still owns 90% of Arm after taking it private in 2016.
- Nvidia, which attempted to buy Arm in 2020, owns 1.96 million shares of Arm, which it acquired in Q4 2023. The shares were worth $280.4 million at the end of Q4.
- Alphabet, the Google parent, is also an investor in Arm, having bought the same amount of shares as Nvidia in Q3 2023.
Image source: Getty Images.
Why billionaires are piling into Arm
Nvidia has been the clear leader in the AI boom and the most obvious way to get exposure to the new technology. Not only has the stock soared but its revenue jumped by triple-digits for five quarters in a row, showing that demand is very much soaring for Nvidia's chips.
The next-best stock to own in the sector is debatable, but Arm seems to be emerging as the winner. The company works closely with Nvidia. Arm's architecture is in the Grace Blackwell Superchip, and Arm's advantage in power-efficient CPU technology is seen as crucial for data center chips because AI data centers consume enormous amounts of energy. Meanwhile, the company continues to grow inside its core smartphone segment as chips get more expensive and licenses for its latest CPU architecture, the Armv9, grow.
During the third quarter, the stock fell sharply in July, in line with a broader pullback in AI stocks, and recouped some of those losses in August and September, even though it still finished the quarter lower than it started.
Is Arm Holdings stock a buy?
Arm has pulled back over the last week as well, in line with a broader retreat over tech stocks as some investors fear that valuations are bloated, especially in AI names.
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 has formidable competitive advantages. Its power-efficient architecture essentially ensures that it will continue to have 99%+ market share of the smartphone market for the foreseeable future as well as an attractive position in the data center market and other applications where preserving battery power is key, like wearable devices.
With the recent pullback in the stock, investors may get a better buying opportunity if they're patient. But over the long term, Arm looks like a winner as the AI revolution plays out. Investors should also remember that it has a strong pipeline of revenue coming in from recent licensing deals.
