This Stock Could Change (Early Investors) Life

One of my most favorite things in the world is finding companies with this structure. The green shows us the improvement of the business over the past 12 months, while the red shows us how the price is really not going anywhere. If I can find a business which has this phenomenal improvement on the business side, but the stock price is either flat or dropping, I'm in love with that setup. This is how we found Palantir in 2022, when the business was getting better every single day, but the price was dropping and dropping. One of the things that this kind of pattern is predicated on is finding a company with a stock price that's not really doing anything. The entire stock market is pretty much euphoria mode and people piling into stocks. This stock price has not been good. On the other hand, if you look at the numbers, and I'm going to make the numbers a little bit bigger here so you guys can see, we have revenue up 23% over the past 12 months. We have EBITDA up 162% over the past 12 months, and we have operating income up 650% over the past 12 months. As you can see, the numbers, the fundamentals are getting better, significantly better, while the stock price is really not doing anything. One of the things I love in the stock market is finding foundational plays. I always loved this idea of being the picks and shovel sellers in the gold rush back in the 1800s. Whenever everybody's looking for gold, killing themselves, the people who sold the shovels, the tents, the jeans, the boots, these are the people who've made their real wealth. The same thing applies whether it's the gold rush of the 1800s or the current AI gold rush. A lot of the stock picks and selections and the analysis and the bullishness we've seen on this channel and in our academy over the past couple of years focus specifically on the infrastructure of the AI revolution or the AI gold rush. This stock is no different. Now, I want to show you this thing right here. I'm going to move myself away. Actually, that's not how I wanted to make it. Let's do it this way so you guys can see. I always love to talk about the AI value chain as analogous to baking a cake. You have the design and EDA, which is basically the recipe where you write the recipe. Then you have the IP, which is a chocolate chips recipe that you have in the family or certain elements. Let's call it the secret family ingredients. Then you have the design, which is planning the cake, the foundry, which is where the cake is baked, the packaging, the testing, the chip where you actually put the cake in the actual shop, the deployment, and then the consumption is where you eat the cake, where you actually meet LLMs, for example, in the real world. Now, in this value chain, we talked about a lot of companies, some of them in the design and EDA stage, like Cadence, some of them in the foundry stage, like TSM, but today, I want to talk to you about a stock that I presented to my community on July 9th, about two weeks ago, that's in the second level, in the IP level, which is where you have the secret family ingredients, the family secrets that nobody else knows about. Let's go forward here a little bit. I think I've held you hostage long enough. Don't click nothing, nothing done by nothing. This stock is called ARM Holdings, ticker symbol A-R-M. It's on the screen right now. It actually lives and thrives in the second stage of the AI value chain, which is the IP. Essentially, what it does, it designs the blueprints of all the chips that are being built by Apple and the other giants like Nvidia and Amazon and so forth and so forth. What they do, essentially, they don't manufacture anything. Just provide the intellectual property, the rights to these builds, and then the builders build the chips and pay them a royalty for every single processor that's being sold. Essentially, ARM is holding down the entire semiconductor industry in this tollbooth model. Every time somebody builds a chip on the globe, ARM gets paid. A lot of you will say, well, Tom, ARM isn't the only player. In a lot of industries, they're literally the only player. In a lot of other industries, they're taking over, and I'll show you why they're taking over. Now, as it stands today, we already have high margins. I'll show you that in a second. We have recurring cash flows. We have exposure, endless exposure to the biggest secular trend of all times, which is artificial intelligence. ARM is located on this intersection of everything that matters right now, and its performance and the fundamentals are out of this world. And yet, as you've seen in the beginning, the stock price is really not amazing. It hasn't done anything. Now, if you look at the company from this kind of high-level snapshot, this isn't some cockamamie little company that can be manipulated or bullshitted. We're talking about $150 billion company. This is a behemoth. This is not some small-cap BS. This is a company that gave you 24% revenue growth over the past year, 650% operating income growth in the past year, and the stock price is somehow down. So basically, the stock price is down while everything else is performing phenomenally. As far as the products of what ARM offers, right? So right now, as it stands, if you're using a mobile phone, it is almost 100% to have ARM technology in it. They dominate, they own, and they completely monopolize without any sort of competition the mobile market, okay? But a lot of people are confused, and they don't realize that ARM is not just in the mobile market. It is much, much more. In fact, quietly, while everybody was asleep, ARM is going hard into the data center. And in the data centers category, they already have Amazon. As a client, Amazon is building edge data centers on this ARM IP. They're heavy into consumer technologies, electronics, smart TVs, home devices, networking equipment. And of course, even the Apple famous M-series, which people absolutely love, it's built on ARM technology. They're basically branching out a lot wider than just mobile phones, and nobody's paying attention to why this is happening, because this is happening for a reason, which I'll talk to you in a second about. So this is kind of a pie chart of how dominant ARM is in the market, right? So in the mobile market, they completely dominate. They own 40% of the automotive market. Right now, only 13% of the data center market, but that number is going to go a lot higher according to the guidance from the company. We're talking numbers within the 40s, 50%. They're about to dominate this market again. PC market, almost 14%. Internet of things, they're dominating. So they're dominating across the board, and these numbers will grow. They will get better. And the business model, to me, can be really summarized in this really simple example, right? So we've got ARM essentially behind the scenes. They're not the performing artists, right? They're just composing a song, and then some famous musician comes in, takes the song, right? In our example, the musicians would be Amazon, Apple, Qualcomm, whatever, right? And the musician performs the song in their own particular style. And when the song becomes popular on Spotify for every time it's played, ARM, the original composer that wrote the song, gets paid a little royalty, right? Not a lot, a little tiny royalty. But here's the kicker, right? ARM doesn't have any factories. ARM doesn't have any expensive machinery. It gets a tiny fee per each produced chip. But guess what? When you're talking large numbers, this little fee adds up, right? And the entire world of devices is built on ARM technology. So because if you're not using ARM, you're losing access to a wide range of already pre-built stacks. It is one of the most stickiest business ever, right? It has one of the best modes in the business, because if you want to work outside of ARM technology, you don't have access to the vast majority of the entire design assets that ARM has basically created in its ecosystem. It almost makes no sense to do it. It seems absolutely counterproductive, right? And the reason, and I promise to kind of explain this to you, why ARM continues to dominate right now, and most importantly, why ARM is becoming a major player in the data center business and nobody's paying attention, is because ARM traditionally, because it originated in the mobile phones, what do you need in a mobile phone back in the day, right? We're talking about a small phone with a small battery, right? So the battery cannot perform that great. So we need a chip that is not draining the battery so quickly because of a mobile phone. Again, we need a chip that doesn't heat so much because it's a mobile phone, it's in your pocket. So it needs to be a very specific chip, which can really operate very efficiently with a battery, not overheat. And that is a demand that came from the mobile world 30 years ago. Guess what? Right now, the data centers, literally the two most important things in the data center world is energy efficiency and heat and cooling solutions. So the biggest problem for data centers is that these things overheat and they need a lot of cooling, and also that they're draining power from the grid. It's very hard to sustain. So when ARM comes in and says, look, we actually, by accident, 30 years ago, built the technology that solves these two problems, data center manufacturers basically saying, yes, sir, how much we can buy, right? And don't forget that basically right now, what would you do without ARM? Okay, so you send, you basically say, well, I'm going to save a few cents on the dollar because I'm not going to use ARM tech. Fine. You just save a few pennies, go right ahead. And now you just lost access to these vast majorities of libraries that are built on ARM. You lost access to the language in its entirety, right? And I was opposed to tariff tensions. ARM doesn't care. You know, they're just selling technology, IP, who cares, right? And the thing is like ARM doesn't really have to do anything. Anytime somebody sells a chip, they make money. So ARM is going to benefit no matter who wins the AI war. ARM is agnostic to the whole AI race. Whoever wins is going to pay ARM. Now their mode is one of the most incredible things I've ever seen, right? Switching from ARM is virtually impossible. You have more than 15 million programmers that have optimized this code. It is energy efficient. It is basically cost effective because of how this ecosystem was built. And everybody knows that ARM technology is safe. It's credible. There's not gonna be any regulatory issues. It is essentially one of the best modes we have in the business. And if you look at 2030 for the next five years with how artificial intelligence and data centers and everything that sort is looking for high throughput chips with lower footprint as far as energy demands and cooling, that is absolutely going to send ARM into the stratosphere. Again, ARM is very, very strong in the automotive market. And we have vehicles becoming more and more computers than anything else. That's gonna play into ARM's hands. Literally, we've got huge demand for sensors, smart appliances, consumer electronics. None of this is going away. And if you look at the numbers I've showed you this chart earlier, we're talking about 650% growth of operating income. If you look at this chart right here, again, we have a gross profit margin here of 96%, folks. It is one of the best margins we've seen in the business. This is what happens when you don't have machineries and factories, $3 billion in cash almost, $300 million in debt. So we have 10 times more cash than debt. And we're operating in a profit margin of above 20%, which is not that bad. And it's not a cheap company at 71 for PE. But again, I talked to you about PE and how companies with huge growth potentials, they're always gonna be seemingly expensive when you look at PE ratios. They're never gonna look cheap for a classic value investor. Now, I actually ran it through my 125 scorecard, and it actually lost 15 points. And I'll show you where. The operating margin was 20, not 25%. So it lost five points there. And it has a high short interest of above 10%, about 12% short interest, which is a little bit too high for my test. So it loses points on short interest and operating margin. And again, not dramatic. And I actually also put it through our stock MVP 100-point scorecard, where it scored 80 out of 100, which is one of the highest scores we have. Not the highest, not the top 10, but a really, really good score. It's losing points based on short interest and high PE ratio, as you would expect. But everything else is perfect, perfect, perfect, perfect. Just perfection across the board. Now, it also has some risks. Of course, it's not risk-free, right? So we have massive reliance on really just a handful of clients here. But then again, these clients are pretty much locked in with ARM. They can never leave. It's like the hotel of California by the Eagles, right? So yes, it's not a lot of clients, but none of them can really leave. And it's not like any of them is going out of business because AI and data centers. And the whole game is just getting started. So all of them will make massive money. ARM is going to get paid. China geopolitical issues, sure. A lot of their clients are Chinese. But then again, look, a lot of it is just political posturing. Regulatory screwing. Somebody may say, well, this is a monopoly. Maybe some days there are going to be regulatory constraints on this company. Again, the NVIDIA ARM merger never happened because of these things. But I don't see anybody going directly at ARM, especially not in this administration. And maybe somebody comes in one day and just completely disrupts the technology of ARM. Again, not an easy feat to achieve with how much of an ecosystem they've created. There's almost no incentive for anybody to do it at this point. Now, my five-year price target for ARM is $416 for the bear case, $509 for the mid case, and $600 for the bull case. That's a 305% upside for the next five years. Now, I want you guys to take a look at this, okay? Payday.com forward slash Tom Nash. This is where we teach you how to become better investors. You also get access to 25 of my best stocks list, which is published on the monthly basis. Access to 60 lectures we already have stored of lectures I've done with the community. One new lecture every week. This happens on the weekly. We post the recordings later. One hour on top of that of office hours with me weekly. And access to our incredible community where you can ask questions and kind of engage with the community and learn a lot of new things. Thank you so much. And I'll see you in the academy if you choose to join. Later.