Billionaire Paul Singer and his fund, Elliott Investment Management, are making waves. The fund was in active talks with Starbucks on a turnaround plan that subsequently saw the company appoint a new CEO. It was also embroiled in a very public fight with Southwest Airlines and has just appointed 10 new members to the airline’s board of directors.
In the tech world, meanwhile, the fund dumped its shares of Nvidia (NASDAQ: NVDA) as he started a new position in Firearms (NASDAQ: ARM).
Nvidia’s sale isn’t surprising, as Elliott called artificial intelligence (AI) “overrated” in a letter to shareholders earlier this month. He added that the technology consumes too much energy and will never become profitable. The letter added that Nvidia is currently in a “bubble.”
Instead, it appears that Singer and his company are betting on fellow chipmaker Arm in the technology space.
What makes Arm different?
While Nvidia has benefited greatly from the increased spending on AI infrastructure, Arm has been a big beneficiary of the proliferation of smartphones. In fact, its technology is in virtually every smartphone in 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 in a product, Arm can collect royalties for years, even decades. The company has said that nearly half of its royalty revenue comes from products released between 1990 and 2012.
More recently, Arm has been moving its customers to a subscription model that gives them access to a broad range of the company’s intellectual property. At the end of the second quarter, 33 customers were using its Arm Total Access platform and 241 were using its Arm Flexible Access platform.
While the company is a leader in the smartphone market, it is now looking to take a significant share in the Windows personal computer (PC) market. The company aims to gain at least 50% market share in this space over the next five years.
The manufacturer is already present in all Mac computers and plans to capitalize on PC makers trying to make their laptops more like the MacBook Air. It has also gained market share in the automotive market, with growth of 28% in that sector in the second quarter.
While Elliott recently said AI is overrated, Arm has also benefited from the growth of AI. During its Q2 earnings call, the company said it is seeing an increase in AI data center licensing due to the need for customization, which then requires Arm-based chips.
The company also developed a collaborative chip with Nvidia, called Grace Hopper, which integrates an Arm-based central processing unit (CPU) with an Nvidia Hopper graphics processing unit (GPU). It will also be integrated into Nvidia’s next-generation Grace Blackwell chip.
Additionally, Arm technology was used for the new CPU data center chips of both Alphabet And Amazon. While Arm doesn’t benefit as much as Nvidia from building AI infrastructure, it still benefits. Meanwhile, cloud computing companies continue to invest money into building that infrastructure.
Is it time to buy Arm?
Elliott’s investment in Arm likely extends a bit beyond the company to its largest shareholder Softbank Bank (Toll free: SFTBF)Elliott owns about 90% of the chipmaker. In June, it was revealed that Elliott had taken a stake worth more than $2 billion in the Japanese investment firm. Elliott has asked 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 likely like Softbank and Arm to abandon their plans to develop their own AI chips and build AI data centers around the world. It’s also possible that Elliott has taken an anti-AI stance in an attempt to persuade Softbank and Arm to do so and buy back its shares instead.
Elliott holds stakes in Softbank and Arm, so the fund’s future is unknown. Looking at Arm in isolation, its stock trades at a forward price-to-earnings (P/E) ratio of 63.5 times, based on analyst estimates for 2025. That’s exponentially more expensive than Nvidia, though Arm arguably has one of the most attractive business models in the chip space, given the length 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 now more attractive than it was before. Still, I’d rather take an initial position and dollar-cost average into the stock on future weakness than go all-in now, given its valuation. In the meantime, if Elliott is right that AI is overrated, his investment in Arm isn’t immune to an AI slowdown.
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Billionaire Paul Singer Just Sold Nvidia to Buy This Chip The stock was originally published by The Motley Fool
