Companies that manage over $100 million in publicly traded stock are required to disclose their holdings via Form 13F filings. These filings, submitted within 45 days after the end of each quarter, offer valuable insights into how large institutional investors are positioning themselves in the market. A recent filing revealed that Nvidia made some key adjustments in the fourth quarter, selling off stakes in two artificial intelligence-focused companies. Specifically, Nvidia decreased its position in Arm Holdings (ARM) by 44% and fully exited its investment in SoundHound AI (SOUN). These moves are particularly noteworthy considering the positive outlook some Wall Street analysts have for both stocks.
For example, Timothy Arcuri at UBS has a target price of $215 per share for Arm, which represents a potential 65% increase from its current price of approximately $130. Dan Ives at Wedbush has set a target price of $22 per share for SoundHound AI, suggesting a 110% upside from its present value of roughly $10.50. Let’s take a closer look at what makes these two companies stand out.
Arm Holdings: A Deep Dive
Arm Holdings designs and licenses central processing units (CPUs) and related subsystems to clients who then develop custom chips. These processors are used in a variety of applications, including mobile devices, data centers, automotive systems, and embedded systems. Arm also provides software development tools that aid programmers in optimizing applications for its chips, particularly in areas such as artificial intelligence (AI). Thanks to its energy-efficient design, Arm hardware is found in the vast majority of smartphones (99%) and in a substantial portion (67%) of other mobile devices.
While Intel and AMD still hold dominance in the personal computer and data center server markets, Arm is gradually increasing its market share. Apple has transitioned entirely to Arm chips in its MacBooks, and tech giants like Alphabet, Amazon, and Microsoft are using Arm technology for their data center processors.
Arm’s financial performance has been encouraging. In the third quarter of the fiscal year 2025, which concluded in December 2024, the company exceeded expectations for both revenue and earnings. Revenue climbed 19% to $983 million, accompanied by a 26% increase in non-GAAP net income, reaching $0.39 per diluted share. The company also reported significant growth in royalty revenue stemming from its newest Armv9 architecture and strong demand for compute subsystems (CSS). These CSS help clients more efficiently build custom chips.
“Increased chip complexity is driving the top hyperscalers to customize silicon on the latest Armv9 and CSS. We are gaining share in the data center with [Amazon Web Services] Graviton, Microsoft Cobalt, Google Axion, and Nvidia Grace Arm-based chips,” disclosed CEO Reed Haas during the fourth-quarter earnings call.
Although Arm’s stock might seem expensive at a current valuation of 91 times adjusted earnings, particularly given the expectation that adjusted earnings will grow at 32% annually through fiscal 2026 (ending March 2026), I believe there’s still room for growth. Hyperscalers are actively investing in custom silicon supporting AI, which should benefit Arm, especially in its Stargate Project. For patient investors, starting with a small position might be wise. So, why did Nvidia reduce its stake?
I suspect that Nvidia was looking to capitalize on their investment. Despite the sale, Arm remains Nvidia’s largest holding, representing 45% of its portfolio. Therefore, it is unlikely that Nvidia has lost confidence in Arm.
SoundHound AI: A Promising but Risky Investment
SoundHound AI specializes in providing voice-based artificial intelligence solutions. Its products are utilized in various sectors, including automotive, restaurants, customer service, and consumer electronics. Its platform also allows businesses to create their own customized conversational applications. Notable clients include established brands like Chipotle, Stellantis, and Qualcomm, with significant potential for expansion.
Investors should be aware that SoundHound faces competition from larger tech companies such as Amazon and Microsoft. However, SoundHound has focused on collecting voice AI data for over 15 years and asserts that its technology surpasses its competitors in speed, accuracy, and understanding complex language.
A recent ranking from analysts at Frost & Sullivan placed SoundHound as a leader in conversational AI within the healthcare sector. The company showed continued revenue growth in the fourth quarter. Revenue jumped 101% to $34 million, but its non-GAAP gross margin fell 25 percentage points, and the adjusted loss increased to $0.05 per diluted share. The company’s cash from operations was negative $108 million, and it holds $200 million in cash and equivalents. Market research firm Juniper Research predicts that spending on voice AI will hit $160 billion by 2026, suggesting a major potential market for SoundHound.
However, its current valuation is extraordinarily high, trading at 49 times sales, which is significantly above the three-year average multiple of 22 times sales. Nvidia likely considered this high valuation when deciding to sell in the fourth quarter. I would advise against investing in the stock at its current price. It is a stock to watch closely, but it is not a buy at this current price.
