Why Arm Holdings Stock Soared Higher Today

Shares of Arm Holdings (NASDAQ: ARM) jumped by 4.8% on Monday during a session in which the S&P 500 rose 0.9% and the Nasdaq Composite rose 1.5%.

Frustrated with his company's progress in the artificial intelligence (AI) space, CEO Mark Zuckerberg has accelerated Meta Platform's already lavish spending on the technology -- and the social media giant's latest AI gambit also gave a lift to Arm Holdings' shares.

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A noteworthy deal in the AI world

Meta announced Thursday that it was acquiring a 49% stake in Scale AI, a company at the forefront of the technology's development, for nearly $15 billion.

Investors in Arm were pleased to hear it because that company -- which until recently has not made its own chips, but rather licensed its technology to other chipmakers -- is launching its own line of AI-capable chips as early as this summer, and Meta will be the first customer for them. The news that Meta has committed to further increasing its AI spending is being viewed as a sign that Arm's relationship with Meta could become even more lucrative than was originally thought.

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Arm faces some headwinds

Arm will keep licensing its cores and other technology to other chipmakers, but this pivot into designing its own chips too could help accelerate its earnings and revenue growth, especially given the customers it has lined up. However, it is also facing accusations in court and complaints filed with numerous regulators by one of its most important customers, Qualcomm, which alleges that it breached its license agreements and is engaging in anticompetitive behaviors. Arm could be forced to alter its business practices and may face steep fines if those allegations are found to be true. Given the uncertainty around how these cases could play out and the stock's lofty price-to-earnings ratio of more than 180, I would avoid Arm shares for now.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms and Qualcomm. The Motley Fool has a disclosure policy.