SoftBank Stock Soars on Arm's Red-Hot AI Rally

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SoftBank Group's shares have skyrocketed to their most overbought condition in nearly two decades, driven by the explosive growth of its semiconductor subsidiary Arm Holdings.

SoftBank retains a roughly 90% stake in Arm following its IPO last year. The chip designer's shares have almost doubled in value over the last week after reporting strong earnings and outlook. Arm aims to capitalize on the artificial intelligence boom beyond its smartphone roots.

This explosive rally has sent SoftBank stock surging over 30% in just three days of trading. On Tuesday, SoftBank's 14-day relative strength index (RSI) hit 88, blowing past the 70 level that signals an asset is potentially excessively overbought.

SoftBank's current RSI reading is the highest it's been since July 2003. Back then, the overbought conditions preceded a swift plunge, with SoftBank shares dropping over 20% in the two trading days after that peak RSI.

The Momentum Behind Arm

Arm disclosed impressive financials last week, projecting 30% revenue growth annually through 2027. This rapid expansion convinced investors that Arm could be a major player in AI chips.

Beyond smartphones, Arm sees opportunities in markets like data centers, autonomous vehicles, and the metaverse. SoftBank founder Masayoshi Son has been vocal about pursuing AI investments, eyeing Arm as a prime asset.

With its rally, Arm's valuation now exceeds $150 billion, dwarfing SoftBank's own $85 billion market cap. Yet SoftBank retains the majority ownership of Arm, meaning it is benefitting greatly from Arm's dizzying growth.

Analysts have attributed SoftBank's three-day, 30% share price surge directly to Arm's performance. But some also urge caution, warning the gains may be unsustainable long-term.

Concerns Over Overbought Conditions

Technical analyst Victor Galliano noted Arm deserves a premium valuation as a high-growth AI stock. However, Galliano cautioned Arm could be becoming a "growth at any price" stock, susceptible to de-rating if growth slows.

Others note SoftBank's reliance on Arm is a risk if the chip designer's sky-high multiple contracts. The pace of SoftBank's investments also lags behind its high cash balance, concerning investors hoping for faster dealmaking.

For now, SoftBank is riding high on Arm's coattails. But its historically overbought RSI suggests a correction could be forthcoming.

In 2003, SoftBank suffered a sharp two-day decline of over 20% after its RSI peaked at similar elevated levels. While Arm's future seems bright, SoftBank investors may want to brace for some potential whiplash.

Sources:

[1] https://finance.yahoo.com/news/softbank-shares-hit-most-overbought-012359910.html

[2] https://news.bloomberglaw.com/private-equity/softbank-shares-climb-again-with-arms-explosive-ai-rally

[3] https://ground.news/article/softbank-shares-climb-again-with-arms-explosive-ai-rally

[4] https://www.bloomberg.com/news/articles/2024-02-13/softbank-shares-hit-most-overbought-level-since-2003-on-arm-jump

[5] https://www.japantimes.co.jp/business/2024/02/13/tech/softbank-shares-up-with-arm-rally/

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