Transcript: Arm’s share price goes crazy

This is an audio transcript of the FT News Briefing podcast episode: ‘Arm’s share price goes crazy’

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Marc Filippino
Good morning from the Financial Times. Today is Wednesday, February 14th, and this is your FT News Briefing. US inflation slowed, but investors just can’t seem to get psyched about it. And if you missed the absolute terror that Arm’s stock has been on, we’ll fill you in on the latest. Plus, US President Joe Biden and Israeli Prime Minister Benjamin Netanyahu have known each other for 40 years, but the war in Gaza is really testing that relationship.

Felicia Schwartz
Biden needs Netanyahu, and they don’t have to be besties, and they’re not, but they need to be able to work together.

Marc Filippino
I’m Marc Filippino, and here’s the news you need to start your day.

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The Federal Reserve expects to cut interest rates three times this year. But the big question is: when? Investors thought the Fed might start cutting in March. Then they started thinking it’s gonna be May but yesterday’s US inflation report poured cold water on that, too. January’s inflation rate slowed less than expected. Estimates clocked the consumer price index at 2.9 per cent and was actually 3.1 per cent. Investors expressed their displeasure with a good old-fashioned sell-off. Yields on the two-year Treasury rose nearly two-tenths of a per cent, its biggest one-day move since last March. The S&P 500 fell about 1.5 per cent. Meanwhile, UK inflation figures are due out today.

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Over the past week, Arm’s stock price has gone through some pretty incredible swings. The UK chip designer jumped 65 per cent over the past few days. Now the buzz wore off a bit yesterday. But even with the significant sell-off, Arm’s share price is still double what it was at the time of its initial public offering in September. So it got us wondering: what the hell is going on? We have the FT’s Rob Armstrong here to help us process all this information. Hi, Rob.

Rob Armstrong
Hey, how are you?

Marc Filippino
I’m good, Rob. Did you like that pun? Process, chip designer, chips- processed things.

Rob Armstrong
Yes. You’re a clever man. I am your CPU.

Marc Filippino
So, Rob, why did we see Arm’s stock price jump so much?

Rob Armstrong
Well, there’s a technical reason for that. And there’s a more fundamental reason. And the technical reason is there actually isn’t that many shares of Arm for investors to trade. The company is 90 per cent owned by the Japanese conglomerate SoftBank. So any investors who wanna buy the stock, there’s just not that much out there. And when that’s the case, a small change in demand can create a large change in the share price. In addition, there seems to have been a meaningful number of people who were short the stock, that is betting against it. And when somebody is betting against a stock and some good news comes and they wanna get out of that bet, they have to buy the shares. So that increased demand for this limited number of shares even further.

Marc Filippino
OK. So that’s the technical reason. What’s the fundamental reason that the share price has been going so crazy.

Rob Armstrong
Good quarter of earnings. The company reported better than expected revenue. It forecast better than expected revenue for the quarter to come. And of course, there is another factor, which is that the two magic letters A and I came up in the earnings report. The executives of Arm were keen to mention how many AI projects were using Arm products. And so that led to questions by analysts and so forth. And we had a classic kind of moment of excitement around artificial intelligence.

Marc Filippino
OK. So can we call Arm an AI story now?

Rob Armstrong
I think the answer to that question is no. There is a sense in which we are undergoing a computing revolution, and Arm will take part in that. Arm chips are known as chips that use less energy than chips with competing designs. As more and more computer capacity is needed, you need more and more low-power chips, so you just start burning all the energy in the world to get all this computer power. However, the core function of AI is performed with computer chips called GPUs, graphics processing chips. Arm doesn’t make GPUs so is Arm involved in the AI story? Yes, but very much as a supporting player, not a key player.

Marc Filippino
Can I ask, does it matter if Arm is an AI success story? I mean, are investors gonna be looking at this any differently depending on the narrative?

Rob Armstrong
Well, you used a great word: narrative, which is so important. And markets are always this great mix of the rational and the irrational. And the irrational force is one that grabs on to narratives and chases them like crazy. And while there is truth to the story, the narrative takes on a life of its own. Arm is a company with extraordinary intellectual property and a good business model. I’m not being all doom and gloom here. All I’m saying is the narrative is important, and the hottest narrative on Wall Street right now is AI.

Marc Filippino
Rob Armstrong is the FT’s US financial commentator. He writes our Unhedged newsletter and is featured on our Unhedged podcast, which both are great by the way. You should really check them out. Links to both are in the show notes. Thanks, Rob.

Rob Armstrong
Thank you.

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Marc Filippino
US President Joe Biden and Israeli Prime Minister Benjamin Netanyahu have known each other for 40 years, but that relationship has never been as strained as it’s been for the past few weeks. Biden has been trying to get Netanyahu to rein in the assault of Gaza, and things between the two leaders could get even worse if Israel launches an offensive in the last safe place in Gaza, a city called Rafah. I’m joined now by the FT’s Felicia Schwartz, who’s been covering the war. Hi, Felicia.

Felicia Schwartz
Hello.

Marc Filippino
Felicia, what was Biden and Netanyahu’s relationship like before the most recent war in Gaza?

Felicia Schwartz
In recent years, it hasn’t been super strong. I think it really has suffered under the weight of this increasingly unpopular war. It reached a high point for a moment when Biden went to Israel, embraced Netanyahu, stood next to him, said, you know, we are here for you. We will do whatever you need as long as it takes. But I think most observers, even within the Biden administration and outside, kind of understood that that rare moment would probably not last.

Marc Filippino
So it seems like their relationship has gotten worse over the past few weeks. What’s happening?

Felicia Schwartz
We’re four months into the war. Israel has set a series of very lofty military goals that it’s been able to meet some, but not all of them. There has been a lot of tension about how Israel’s prosecuting the war. The death toll on the Palestinian side in Gaza, is it about 28,000 right now? And US is increasingly sceptical about what Israel is able to do there and wants to see this wind down. And Netanyahu, of course, is under his own tremendous pressure. So he wants to do as much as he can to push this military offensive ahead.

Marc Filippino
Let’s go back to Biden for a second. What are the domestic factors that are driving Biden’s criticisms against Netanyahu?

Felicia Schwartz
He is up for re-election. Not sure if you heard.

Marc Filippino
Yeah, oh yeah.

Felicia Schwartz
I think we see a generational split on Israel in general, but especially in particular in the Democratic party. And he is relying on a base of progressives who need to turn out to vote for him in November. And that in particular, some of the swing states that will be really important to him, such as Michigan, have Arab-American populations that he needs to see, you know, actually show up to the polls and vote for him. These are probably not people who would vote for Donald Trump, but if they decide not to vote it all, it could cost him.

Marc Filippino
What about Netanyahu’s side? Why isn’t he listening more to Biden?

Felicia Schwartz
The political views of the Israeli public has been drifting to the right for years, and that’s only more true since this terror attack in October. And in Netanyahu’s case in particular, he is on trial for corruption, and remaining prime minister is his best protection from jail. And, you know, he’s obsessed with his legacy. You know, he wants to be seen as the greatest leader Israel has ever had. Now, at this particular moment, he is the Israeli leader who let the public down and could end his tenure in jail.

Marc Filippino
What does this ultimately mean for Biden and Netanyahu’s relationship? I mean, do we have any sense of how this is all going to play out?

Felicia Schwartz
I think that Biden is not willing to use the actual levers that he could to fundamentally disrupt this relationship, such as, you know, withhold or condition military aid or even not defend Israel at the UN. At the end of the day, Biden wants to knit together this grand bargain that would see normalisation between Israel and Saudi, a pathway towards a Palestinian state, the end of the war. And Netanyahu’s not really going anywhere, probably before the election. So if any of this stuff is gonna happen, Biden needs Netanyahu, and they don’t have to be besties. And they’re not. But they need to be able to work together. They can be blunt and disagree in private and sounds like they are. But I don’t know that things will change very much.

Marc Filippino
Felicia Schwartz is the FT’s US foreign affairs and defence correspondent. Thanks, Felicia.

Felicia Schwartz
Thanks for having me.

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Marc Filippino
Before we go, it looks like Coca-Cola is now inflation-proof. The company reported quarterly earnings yesterday and said sales are going up, even though prices are also going up. Coca-Cola’s earnings report is one of the first signs that food and drink companies are starting to shake off higher operating costs.

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You could read more on all of these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.