We recently published a list of Hedge Funds are Buying and Selling These 10 AI Stocks. Since Arm Holdings PLC – ADR (NASDAQ:ARM) ranks 10th on the list, it deserves a deeper look.
The AI-led rally in the stock market is expected to ripple through other sectors and smaller tech companies, but analysts believe for now large-cap companies are still the key focus of money managers. Morgan Stanley in its August key themes report said that while small-cap stocks rebounded on rate-cut hopes, the window for their outperformance is “too narrow.”
“Historically small cap outperformance depended primarily on economic growth acceleration. Greater risk exposure to a “higher-for-longer” rate environment has added inverse rate correlation to the mix. While periods of growth acceleration with lower rates are plausible (e.g. end-2023), we see this combination as relatively unlikely in the current inflation environment. The recent decline in interest rates was a tailwind to small cap stocks, but softer economic data likely limits the durability of this trade,” the firm said.
The latest earnings season showed that ROI on the huge AI spending by major companies is small in the short term, but long-term gains seem promising. Many companies have already started seeing monetization on their AI investments. Goldman Sachs analysts Joseph Briggs, Kash Rangan, and Eric Sheridan said in a June report titled GEN AI: TOO MUCH SPEND, TOO LITTLE BENEFIT? that they remain more optimistic about AI’s economic potential even if we don’t see immediate benefits for now.
Hedge funds are one step ahead of average individual investors due to the sheer scale of resources and capital they have. That’s why it’s always interesting to see which stocks they are buying and selling. In this article we take a look at the 10 most important AI stocks which were on the radar of elite money managers based on their second-quarter filings. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Arm Holdings PLC – ADR (NASDAQ:ARM)
Total Number of Hedge Fund Investors as of the End of Q2: 38
Total Number of Hedge Fund Investors as of the End of Q1: 29
Billionaire Paul Singer believes Mag. 7 stocks might be in a bubble land, but he opened a new stake in Arm Holdings PLC – ADR (NASDAQ:ARM) during the second quarter, buying 150,000 shares of the company.
Arm Holdings PLC – ADR (NASDAQ:ARM) shares fell after the company posted fiscal first-quarter results and gave guidance that failed to impress Wall Street. Analysts believe extremely high expectations are affecting the stock as the market continues to expect rapid growth at once. ARM revised its guidance for the full year which still points to about 27% year-over-year revenue growth.
Revenue growth at Arm Holdings PLC – ADR (NASDAQ:ARM) is expected at around 22% over the next few years.
Why is ARM a promising stock? The company makes advanced microprocessors that are key to most electronic devices, known for their power efficiency and high performance. These processors are used in everything from smartphones and laptops to automotive systems and cloud data centers. The company generated revenue by licensing its designs to manufacturers and earning royalties from products that use its technology. Demand for its technology is rising, particularly in AI, smartphones, and cloud computing. New product launches and partnerships with companies like Google and AWS further bolster its market position. Arm anticipates continued growth in licensing and royalty revenues, fueled by the adoption of its v9 architecture.
Despite this, the stock’s forward P/E of 80 is too high a price to pay right now when competition is increasing and investors’ patience on AI monetization is running thin.
Overall Arm Holdings PLC – ADR (NASDAQ:ARM) ranks 10th on Insider Monkey’s list titled Hedge Funds are Buying and Selling These 10 AI Stocks. While we acknowledge the potential of Arm Holdings PLC – ADR (NASDAQ:ARM), our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ARM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.