Why Arm Holdings Stock Soared 36% Last Month

Arm’s stock surge nearly 36% higher in June — but why? Here’s what you need to know, and some advice on how to treat the red-hot stock today. Spoiler alert: Bring oven mitts to this party.

Shares of Arm Holdings (ARM 7.70%) rose by 35.8% in June 2024, according to data from S&P Global Market Intelligence. The jump continued a broad uptrend for the semiconductor technology expert, adding up to a 117.7% gain in the first half of the year.

Arm’s gains are driven by the ongoing frenzy for advanced artificial intelligence (AI) software and the hardware that makes those apps tick. And Arm investors are also paying close attention to the global and American economies.

Analyst ratings and economic trends

The enthusiasm for AI technologies has significantly boosted investor interest in companies involved in AI hardware. While the AI success of Nvidia (NVDA -1.91%) and AMD (AMD 4.88%) doesn’t directly lean on ARM architectures — they primarily use their proprietary platforms instead — Arm benefits indirectly from the AI boom. The positive market sentiment toward AI advancements continues to propel Arm’s stock upwards. Furthermore, the company’s former focus on low-power embedded and mobile chips is changing before your eyes. These days, you’ll find Arm-based chips all over modern data centers and PC systems.

Arm’s stock received notable boosts from several analyst upgrades in June. At least two leading analyst firms raised their target prices on Arm stock last month, citing strong revenue growth and potential market share gains against the likes of Nvidia and AMD. These bullish endorsements reinforced investor confidence in Arm’s growth prospects, resulting in mild price gains along the way.

The broader market dynamics also played a role in Arm’s June rise. A softer-than-expected jobs report in May fueled hopes for potential interest rate cuts by the Federal Reserve, which would benefit growth stocks. The semiconductor sector is full of growth stories, including Arm. This positive macroeconomic backdrop created a helpful environment for Arm’s stock to flourish.

Strategic industry developments

Industry news also contributed to Arm’s strong performance. Reports that Taiwan Semiconductor Manufacturing (TSM 0.82%) was investing in extreme ultraviolet lithography suggested a robust demand for next-generation chip technologies. As TSMC is a leading manufacturer of Arm-based chips, this investment indicated a positive outlook for Arm’s future growth.

Arm’s strategic positioning in the AI ecosystem highlights its potential for sustained growth. The company’s advanced v9 architecture and its power-efficient processor platforms are increasingly interesting to major industry players, strengthening Arm’s competitive edge in the semiconductor market.

Finally, Arm also earned a rare market accolade last month. The stock was added to the Nasdaq-100 Index on June 24. This prestigious index, which informs the popular Invesco QQQ Trust (QQQ 1.04%) and other Nasdaq-tracking exchange-traded funds, comprises the top 100 largest and most actively traded companies on the Nasdaq stock exchange.

Arm’s rapid inclusion in the index after an initial public offering last September reminds investors of its growing importance in the global technology ecosystem. As CEO Rene Haas highlighted in that announcement, this achievement validates Arm’s business strategy and its critical role in providing foundational compute solutions for AI workloads.

Watch Arm’s stock closely, but hold off on buying it

The stock isn’t cheap these days. Whether you measure the valuation by price-to-earnings, price-to-sales, or price-to-free cash flow ratios, Arm’s stock almost always makes Nvidia and AMD look affordable by comparison. In other words, Arm isn’t a value investor’s favorite AI pick. Even die-hard growth investors might want to take it easy with this red-hot stock at the moment. In my eyes, Arm is the kind of AI stock that could serve your portfolio well in the long run — from a lower starting price.

Anders Bylund has positions in Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.

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