Shares of ARM Holdings surged more than 40% on Monday, adding to a staggering rally fuelled by optimism around artificial intelligence.

The stock last traded up 21% at US$139.65 after reaching as high as $164, 42% above its close on Friday.

With Monday’s jump, ARM’s shares have gained more than 80% since the British tech company last Wednesday became Wall Street’s newest AI-related darling following a quarterly outlook that beat Wall Street’s expectations.

ARM’s stock market value has now reached a record $141-billion, nearly tripling since its initial public offering last September.

About 10.5 million ARM shares, worth about $1.4-billion, have been sold short by traders betting the stock will fall, according to Ihor Dusaniwsky, MD of predictive analytics atS3 Partners, which tracks short sellers.

However, there is little evidence Monday’s stock surge is the result of a short squeeze, which occurs when short sellers rush to buy back shares in order to cover a potentially money-losing trade, Dusaniwsky said.

“Although there has been some short covering, the primary reason for the stock move is long share buying,” Dusaniwsky said.

The recent spike in ARM’s shares echoes sharp gains in Nvidia in May 2023 after the Silicon Valley chip maker said AI computing was fuelling massive demand for its chips.

After Nvidia’s stock market value more than tripled last year, on Monday it briefly overtook Amazon.com and Alphabet (Google) as the US stock market’s third most valuable company.

Tighly held

Unlike Nvidia, only a fraction of ARM’s shares are available for trading. Following its IPO, owner SoftBank kept a 90.6% stake. The chip designer’s 10 largest shareholders control almost 95% of its shares, according to LSEG data. That tiny supply of ARM shares available for trading may be contributing to the stock’s recent surge.

By comparison, Nvidia’s top 10 shareholders own about a third of the company.

Softbank could sell some of its ARM stake starting on 12 March after lock-up restrictions related to the IPO end.

With Monday’s rally, ARM is trading at an exceedingly high 99x expected earnings, even after analysts last week dramatically lifted their earnings estimates, according to LSEG data.

Read: And now for Nvidia’s next act

Nvidia’s forward PE briefly hit 84x last June, but quickly fell as analysts raised their earnings estimates at a faster pace than the company’s stock rally. Nvidia’s stock is now valued at 34x expected earnings. — Noel Randewich, (c) 2024 Reuters