SEMICONDUCTORS

Big Tech Competition Is Fueling Arm’s Growth — But Valuations Are Scaring Investors Off

It’s been just over a month since Taiwan, the semiconductor mecca of the world, was rocked by a major 7.2 earthquake, and its effects are still rippling through the industry. The latest blow came from chip designer Arm ($ARM), whose earnings report yesterday caused its stock to drop by 7% after hours — as strong results were overshadowed by lower-than-expected full-year sales forecasts.

Skipping Arm day: Arm, riding high on the wave of AI growth, has seen its stock double since its IPO last year. However, investors are beginning to worry that the AI-fueled market rally could be running out of steam. While chips designed by Arm power nearly every smartphone globally, it has gradually gained traction in data centers, increasing its market share from just under 1% in 2019 to 10.1% in 2022.

• And it’s all thanks to Big Tech companies, which are building their own custom data center chips in-house, using Arm technology.

• In 2018, Amazon ($AMZN) launched its first Arm-based data center chips — then nearly every other leading cloud provider followed, including Alibaba ($BABA) in 2021, Microsoft ($MSFT) in 2023, and finally Google ($GOOG) last month.

Big Tech says no to leg days

Beyond phones and data centers, Arm Holdings is also making headway in the PC market — where it’s projected to nearly double its notebooks market share from 14% in 2023 to 25% by 2027, according to Counterpoint. And it’s thanks to, yet again, competition among Big Tech companies racing to develop faster devices.

• In 2020, Apple cut ties with Intel ($INTC) in favor of Arm for its MacBooks, prompting Microsoft to introduce its first Arm-powered laptops this year in an attempt to catch up to Apple’s ($AAPL) M3 chips.

• If Microsoft’s new laptops deliver in performance, other PC manufacturers like HP ($HPQ) and Dell ($DELL) could begin their own rollout of Arm-powered PCs.

Pushing the limit: With a price-to-sales ratio of 27x, Arm is the most expensive company on the Nasdaq-100 — surpassing Nvidia ($NVDA) at 19x. Making things even riskier, SoftBank owns nearly 90% of Arm, resulting in limited shares available for trading — which can lead to higher volatility and larger price swings. While the semiconductor industry shows promise for growth, investors wonder what lies ahead when you’re already at the top. Perhaps Nvidia’s earnings report on May 22 will provide some insight.

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LARGECAP RECAP

🛒 Analysts add Shopify back to their carts

E-commerce platform Shopify ($SHOP) knows a thing or two about going up too far, too fast — first soaring over 385% during COVID, but plummeting by 85% shortly after. Again, yesterday, it faced its biggest intra-day decline, dropping 20% after a 124% rise in 2023. Despite surpassing sales expectations in its first-quarter earnings, Shopify warned of potential profit margin decreases due to increased marketing expenses.

• This news surprised analysts, who had been bullish on Shopify with the most buy ratings since 2022, and many upgraded the stock prior to the report.

• But if they loved it at $77, they should love it even more at $62 — as Huntington National Bank’s Senior Analyst David Klink thinks Shopify “has a long-term place in the e-commerce world” (BBG).

Caught between two forces: Uncertainty looms over interest rate cuts, leading companies to hesitate on new technology investments. Additionally, retail sales fluctuate as consumers navigate economic pressures. Over the next two weeks, the release of April’s inflation report and earnings reports from Walmart ($WMT) on May 16 and Target ($TGT) on May 22 will give us more data points on the state of the consumer market.

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Markets & Economy

Strong corporate profits make a recession feel far off: It’s been a solid earnings season, seeing S&P 500 earnings per share climb 5.2% from last year. Earnings calls are upbeat, with few mentions of a recession — making a tough April jobs report feel a bit less dire. [Read]

US removes Intel and Qualcomm’s ($QCOM) license to sell to Huawei: The Chinese telecom’s recent launch of an AI-powered laptop prompted Republican lawmakers to revoke these licenses, citing national security and “protecting American ingenuity.” [Read]

Reddit’s ($RDDT) first quarterly earnings are a success, sending shares up 11%: Strong ad revenue contributed to a 48% revenue increase compared to last year, surpassing expectations for daily active users in the first quarter. [Read]

Business & Wealth

Beware those surprise fees: While the Biden admin has waged a “war on junk fees,” attending concerts, booking hotel rooms, or ordering delivery will still likely come with plenty of fees — and getting billed a single flat fee remains elusive. [Read]

OpenAI has a search product in development: The AI startup could take on Google by introducing a feature in ChatGPT that searches the internet and provides cited online sources for user queries. [Read]

It’s a great time to be a homeowner: The two-thirds of Americans who own homes enjoy a record $17T in combined equity. The other side of the coin? The housing shortage persists, driving up home values but also shutting out renters who want to make the leap to homeownership. [Read]

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DIGIT OF THE DAY

America’s Tech Future Is Looking Chipper As It Sets To Triple Its Semiconductor Production By 2032

It’s not just a chip off the old block — America is carving out a whole new frontier in semiconductor manufacturing. The outsourcing-dependent US chip industry has been losing ground to Taiwan and Korea for years. But thanks to the 2022 CHIPS Act, the US aims to boost its global chip share to 14% by 2032 — up from the current 10%.

• The CHIPS Act allocates $39B in grants, $75B in loans, and 25% tax credits to incentivize semiconductor firms to build factories in the US.

• By 2032, the US plans to produce nearly 30% of the world’s advanced logic chips — an impressive jump from the 0% right now.

Global competition intensifies: The US faces competition from China and the EU, both of which are ramping up their chipmaking capabilities. Moreover, the ongoing labor shortage of construction workers, technicians, and electricians could also complicate the building and operation of new manufacturing plants. Despite these hurdles, US Commerce Secretary Gina Raimondo remains optimistic, projecting that the country will manufacture one-fifth of the world’s advanced logic chips by the decade’s end.