Billionaire Paul Singer and his fund, Elliott Investment Management, are making waves. The fund has been in active discussions with Starbucks on a turnaround plan that subsequently led to the company appointing a new CEO. It has also been in a very public battle with Southwest Airlines and has just nominated 10 new board members for the airline.
In the technology sector, the fund has since sold its shares. Nvidia (NASDAQ: NVDA) while you start a new position in Arm Holdings (NASDAQ: ARM).
Nvidia’s sale comes as no surprise after Elliott called artificial intelligence (AI) “overhyped” in a letter to shareholders earlier this month, adding that the technology was too power-hungry and would never become cost-effective. The letter added that Nvidia was currently in “bubble land.”
Instead, it appears Singer and his team are putting their money on fellow chipmaker Arm in the technology sector.
What makes Arm different?
While Nvidia has benefited greatly from the increased spending associated with building out its AI infrastructure, Arm has benefited greatly from the proliferation of smartphones. In fact, its technology can be found in virtually every smartphone around the world.
Arm also has a very different business model than Nvidia. While Nvidia designs its own chips, Arm licenses its technology for use by other chipmakers. The company then collects royalties based on the number of chips built on its architecture that are shipped. Once its technology is designed into a product, Arm can collect royalties for years or even decades. The company has said that nearly half of its royalty revenue comes from products released between 1990 and 2012.
Arm recently transitioned customers to a subscription model, giving them access to a wide range of the company’s intellectual property. At the end of Q2, it had 33 customers using the Arm Total Access platform and 241 using the Arm Flexible Access platform.
While the company is the leader in the smartphone market, it now wants to capture a large share of the Windows-based personal computer (PC) market. The company aims to gain at least 50% market share in the next five years.
It’s already in every Mac computer and will look to capitalize on PC makers trying to make their laptop designs more like MacBook Airs. It’s also been gaining share in the automotive market, with 28% growth in the vertical in Q2.
While Elliott recently said AI is overhyped, Arm is also benefiting from AI expansion. During its Q2 earnings call, the company said it was seeing more licensing in the AI data center due to the need for customization, which then requires Arm-based chips.
The company also has a collaborative chip with Nvidia called the Grace Hopper, which integrates an Arm-based central processing unit (CPU) with an Nvidia Hopper graphics processing unit (GPU). It will also be designed into Nvidia’s next-generation Grace Blackwell chip.
In addition, Arm technology has been used for new CPU data center chips from both Alphabet And Amazon. While Arm doesn’t benefit as much from the buildout of AI infrastructure as Nvidia, it still benefits from it. Meanwhile, cloud computing companies continue to pour money into building this infrastructure.
Is it time to buy Arm?
Elliott’s investment in Arm likely extends beyond the company itself to its largest shareholder Soft sofa (OTC: SFTBF)that owns about 90% of the chipmaker. In June, it was revealed that Elliott had taken a stake of more than $2 billion in the Japanese investment firm. Elliott has called on Softbank to buy back $15 billion of shares, while the company recently announced a smaller buyback plan of $3.4 billion.
Given Elliott’s comments on AI, the fund would also likely want Softbank and Arm to back off their plans to develop their own AI chips and build AI data centers globally. It’s also possible that Elliott took an anti-AI stance to convince Softbank and Arm to back off and buy back their shares instead.
Elliott has stakes in both Softbank and Arm, so the fund’s ultimate stake is unknown. Looking at Arm separately, the stock trades on a forward price-to-earnings (P/E) multiple of 63.5 times, based on analyst estimates for 2025. That’s exponentially more expensive than Nvidia, even though Arm arguably has one of the most attractive business models in the chip sector, given the amount of time it collects royalties on products as well as the licensing revenue it generates.
After Arm’s recent pullback, I think the stock is more attractive now than it was before. Still, I’d rather take an entry position and dollar-cost average into the stock on future weakness than get in now, given the valuation. In the meantime, if Elliott is right that AI is overhyped, his Arm investment is not immune to an AI downturn.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Geoffrey Seiler holds positions at Alphabet. The Motley Fool holds positions at and recommends Alphabet, Amazon, Nvidia, and Starbucks. The Motley Fool recommends Southwest Airlines. The Motley Fool has a disclosure policy.
Billionaire Paul Singer Just Sold Nvidia to Buy This Chip Stock was originally published by The Motley Fool
