1 Chip Stock Making Bold Plans
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We've got earnings galore on Motley Fool Hidden Gems Investing. Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by longtime contributors John Quast and Matt Frankel. We're going to do a whole bunch of earnings reactions today because it's been a busy week related to earnings. And of course, we're going to hit our mailbag at the end of the show. First, as we're going to start, we're going to talk about basically semiconductor earnings because it has been one of the big talking points of the week. Arm Holdings and Advanced Micro Devices, AMD, both reported within the past couple of days. And after both earnings, we saw shares explode as they blasted past earnings expectations, 15%, 20% moves in the day.
We're going to start with Arm Holdings today because shares are quickly retreating after the company mentioned on its call after hours, that mobile growth was, well, not really growth, and that rising costs were going to impact commodity mobile device sales. John, Matt, you two played rock, paper, scissors to cover the two. John, you happened to pick Arm Holdings as a result. What did you see in the earnings release and the conference call? And was today's reaction to this, hey, maybe mobile growth isn't great, was that like an appropriate response, do you think, to what you saw?
Well, Tyler, I think the market reaction is appropriate, but not for the reason that you mentioned here. And so I just want to frame this. It is important that you mention the mobile aspect of the business, because if we zoom way out, I don't want to take for granted that all of our listeners know what Arm Holdings is. This is a company that really rose in prominence due to mobile devices. Its chips are more energy efficient than other chips on the market. And that's a really big deal when you're looking at battery life in a mobile device. So it was able to rise. It does not make its own chips. Historically, it licenses these products to the manufacturers of the mobile devices. But if you look at what we have right now in AI, we have a bottleneck.
You've heard about many bottlenecks.
What are the recent earnings results from ARM Holdings and AMD?
The big one is electricity. Power is scarce, and this is driving AI companies to try to find more energy efficient solutions. And so ARM makes CPUs, and it claims they're two times more efficient than conventional x86 infrastructure or architecture. And that's the kind that Intel makes, for example. And so ARM is claiming that they can save AI companies 10 billion per gigawatts in capital expenditures in a data center. So that's a really big deal. And I think the big news here lately with ARM has been it's not going to just license the technology anymore. It's going to make its own chips. It's going to actually be a chip maker. And it's kind of a no brainer. According to the company, it can make 10 times the gross profit per chip than just licensing it.
So, I mean, that's a huge thing. And if you look, management says here in the most recent quarter, it already has $2 billion worth of demand over the next two years for its custom or for its in-house chips. So that's a really big adoption curve. That's really good. But what is the hang up here? The hang up here is that if you look out to fiscal 2031, which mostly overlaps with calendar 2030, so just four years away from now, It's saying that, look, by then we'll have $25 billion maybe in trailing 12-month revenue. Maybe we'll have $9 in adjusted earnings per share. You look at where the market cap was before earnings, and it's gone up a lot, mostly due to competitors' earnings results already. It was trading at an over $250 billion market cap.
Projecting maybe $25 billion in annual revenue in four years. That's over 10 times its four-year forward sales. And you look at earnings, it's trading at somewhere in the ballpark of 23 times earnings on an adjusted basis four years out into the future. That's a really pricey valuation for a company that a lot of exciting things are happening. And I do believe that its products are going to be more and more needed for AI data centers, but it just got way out in front of its skates here.
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