Billionaire Paul Singer and his fund Elliott Investment Management are causing a stir. The fund was in active talks with Starbucks on a restructuring plan, which subsequently led to the appointment of a new CEO. There was also a very public battle with Southwest Airlines and has just nominated ten new board members for the airline.

In the technology sector, the fund sold its shares in NVIDIA (NVDA 4.35%) when starting a new position in Arm Holdings (ARM 1.54%).

The sale of Nvidia comes as no surprise after Elliott called artificial intelligence (AI) “overvalued” in a letter to shareholders earlier this month, adding that the technology consumes too much energy and will never become cost-effective. The letter went on to say that Nvidia is currently in “bubble land.”

Instead, it seems that Singer and his company are relying on chip manufacturer Arm in the technology sector.

What makes Arm different?

While Nvidia benefits greatly from increased spending on building out AI infrastructure, Arm benefits greatly from the proliferation of smartphones. In fact, the company’s technology can be found in virtually every smartphone around the world.

Arm also has a very different business model than Nvidia. While Nvidia develops its own chips, Arm licenses its technology for use by other chipmakers. The company then collects royalties based on the number of chips built on its architecture. Once its technology is incorporated into a product, Arm can collect royalties for years or even decades. The company has stated that nearly half of its royalty revenue comes from products launched between 1990 and 2012.

Recently, Arm has been moving its customers to a subscription model that gives them access to a wide range of the company’s intellectual property. At the end of the second quarter, 33 customers were using the Arm Total Access platform and 241 were using the Arm Flexible Access platform.

While the company is a leader in the smartphone sector, it now wants to capture a large share of the Windows-based PC market as well. The company’s goal is to gain at least 50% market share in this space in the next five years.

It’s already built into all Mac-based computers and will look to capitalize as PC makers try to bring their laptop designs more in line with the MacBook Air. It’s also been gaining market share in the automotive market, posting 28% growth in that industry in the second quarter.

While Elliott recently said AI is overvalued, Arm is also benefiting from AI expansion. On its second-quarter earnings call, the company said there is increased licensing in the AI ​​data center due to the need for customizations that then require Arm-based chips.

The company has also developed a joint chip with Nvidia called Grace Hopper, which integrates an Arm-based central processing unit (CPU) with an Nvidia Hopper graphics processing unit (GPU). It will also be integrated into Nvidia’s next-generation Grace Blackwell chip.

In addition, Arm technology was used for new CPU data center chips by both alphabet And Amazon. Arm is not profiting as much from the expansion of AI infrastructure as Nvidia, but at least it is. At the same time, cloud computing companies are continuing to invest money in building this infrastructure.

Image source: Getty Images.

Is it time to buy arm?

Elliott’s investment in Arm likely goes somewhat beyond the company and also affects its largest shareholders. Softbank (SFTBF 0.92%)which owns around 90% of the chipmaker. In June, it was revealed that Elliott had acquired a stake worth over $2 billion in the Japanese investment firm. Elliott called on Softbank to buy back $15 billion worth of shares, while the company recently announced a smaller buyback plan worth $3.4 billion.

Given Elliott’s comments on AI, the fund also likely wants Softbank and Arm to back away from their plans to develop their own AI chips and build AI data centers around the globe. It’s also possible that Elliott has taken an anti-AI stance to persuade Softbank and Arm to buy back their shares instead.

Elliott owns shares in both Softbank and Arm, so the fund’s ultimate exposure is unknown. Looking at Arm in isolation, its stock trades at a price-to-earnings (P/E) ratio of 63.5 based on analyst estimates for 2025. That’s exponentially more expensive than Nvidia, even though Arm arguably has one of the most attractive business models in the chip space, given how long it has been collecting royalties on products and how much licensing revenue it generates.

ARM P/E data (Forward 1 year) from YCharts.

After Arm’s recent share price decline, I think the stock is more attractive now than it was before. Still, given the valuation, I would rather take a starting position and invest in the stock on a dollar-cost average basis on any future weakness than jump in now. If Elliott is right that AI is overvalued, his Arm investment is not immune to an AI downturn.