Summary

• The hype around Project Stargate is gaining momentum, but the benefits for shareholders of the parties involved are still uncertain.

• The market's reaction to the news was very positive with ARM's stock skyrocketing by as much as 16%.

• I explain why this movement was exaggerated and why the ARM stock is unlikely to deliver satisfactory returns over the coming year.

With the equity market running hot at extremely high valuations, risks for certain growth stocks are hard to ignore.

On top of all that, investors should be fully aware of implications from the hype-driven momentum trading in recent months on the back of rhetoric from the Trump Administration. Although the ongoing de-regulation is pro-business and is likely to be very beneficial for US-based companies, many investors are rushing to front-run the market based solely on news, speculation and highly uncertain events.

It seems that the news about the creation of Project Stargate is almost a perfect example of a potentially good initiative that is creating too much optimism in the near-term.

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In spite of the punchy headlines and huge amounts of future investments being announced, the briefing itself was quite vague. Sam Altman, the CEO of OpenAI, did not provide any meaningful commentary and did not add much to what was already said by the other two participants in the announcement. To me personally, he seemed unwilling to commit to anything and simply used the podium to pay his tribute to the President.

Masayoshi Son of Japan's Softbank (OTCPK:SFTBF; OTCPK:SFTBY) had mostly emotional remarks and seemed entertained by reiterating his conversations with President Trump. Although the Softbank Group could deploy significant capital, investors should keep in mind that their vision-oriented investing does not always deliver in terms of shareholder value.

Data by YCharts

For me personally, I am still negatively-biased when evaluating Softbank's massive investment projects and I vividly recall the analysis being done behind some of their investments.

SoftBank

In my view, perhaps the biggest beneficiary here is likely to be Oracle (NYSE:ORCL). I was quite surprised to see Larry Ellison given his rare public appearance and a more private approach when it comes to media attention. He also seemed the only participant who gave more specifics about the project and namely the healthcare part.

As of today, ORCL seems to be positioned as the biggest beneficiary from this project given the company's strategic positioning in the healthcare space from the Cerner acquisition and the company's unique standing within cloud infrastructure.

Overall, years down the line the net effect of the Project has the potential to be significant, however, the main beneficiaries and the distribution of shareholder wealth throughout this period is still highly uncertain to say the least. Nonetheless, we saw share prices of the key partners within the Project skyrocketing on the day following the announcement with Softbank's stock skyrocketing by nearly 11%.

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As one of the first strategic partners in the Project Arm Holdings plc (NASDAQ:ARM) stock also jumped yesterday and to my surprise by as much as 16%.

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At this point in time this preliminary optimism is very hard to quantify and from all the aforementioned players, ARM seems to be at a very high risk of investors overestimating the total benefit for the company. According to ARM CEO's Rene Haas the CPUs in the data centers will be based on the ARM architecture, while the GPUs will based on Blackwell's platform.

Even though this might be enough for some investors to jump on the bandwagon of hype, there are many risks and uncertainties involved here:

• The financing of this project is a big question mark.

I won't speculate too much on this side, but you can read more on financial details here.

• The tug-of-war between the parties involved.

Even though the roles within the project might seem well-defined, the fact that many influential people are involved poses significant risks of some taking advantage of their closer political alignments.

• Regulation challenges are often underestimated.

In spite of Trump's stance on de-regulation, the project poses significant challenges in highly regulated areas, such as healthcare.

• The energy component.

Lastly, there lots of uncertainties regarding land usage and the additional energy requirements that will need to be solved.

In a nutshell, all that is leading me to believe that ARM's 16% jump yesterday is not substantiated and simply adds to near-term shareholder risks that I have outlined back in October of last year.

The ARM Stock

Even though ARM's success has been largely attributable to that of Nvidia (NVDA), the former stock has been lagging behind in terms of performance.

Data by YCharts

The recent jump in the share price has also brought ARM to valuation levels that have proven to be unsustainable in recent past. In spite of the high growth opportunities a price to sales ratio of almost 54 is extremely risky for a stock with operating income margin of below 12%.

Data by YCharts

Moreover, back in October when I first covered ARM, the stock had a year-on-year revenue growth of 31%, which was way-lower to that of NVDA.

Revenue Growth as of October of 2024 (prepared by the author, using data from Seeking Alpha)

A couple of months later and the year-on-year growth has now slowed down to below 25% (see below). In the light of the much higher price/sales multiple this is a major red flag for anyone who is willing to buy ARM at current levels.

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To make matters even worse for ARM's short-term risks, the company is faced with the need to spend increasing amounts on research & development and selling, general & admin expenses which is having a major impact on operating income.

prepared by the author, using data from Seeking Alpha

Investor Takeaway

Although the Stargate Project has the potential to bring significant shareholder value for the parties involved, the distribution and timing of these benefits is still highly uncertain. There are also numerous risks involved which makes the task of quantifying the benefits for ARM even harder. Having said that, the stock's recent jump is unlikely to be sustainable and given the recent business performance investors buying at current levels are unlikely to be satisfied with their future returns.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.