Arm Holdings (ARM) shares skyrocket Monday morning as the chip designer's valuations now eclipse that of chip giant Nvidia (NVDA). The company beat fiscal third-quarter earnings estimates on the top and bottom line last week. Will generative AI trends push this stock higher and vice-versa?

TECHnalysis Research, LLC President and Chief Analyst Bob O'Donnell and Charles Shi, Needham & Company Managing Director and Senior Analyst, join Yahoo Finance to discuss Arm's latest catalysts, which Shi calls the chip company's recent valuations to be "a head-scratcher" when referenced among companies who have prioritized artificial intelligence for much longer.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

- Arm opens the day higher up over 9% today and 70% from a week ago. Now, this pop in the stock has sent the chip designer's valuation soaring, now valued over 90 times forward earnings surpassing AI darlings, Nvidia and AMD. But is Arm actually worth the hype?

Well, joining us now are Charles Shi, Needham and Company managing director and senior analyst and Bob O'Donnell, TECHnalysis Research President and chief analyst. A big welcome to you both.

So Charles, I want to start with you. In terms of this valuation, what is the base case for it having this valuation that's blowing past a leader like Nvidia?

CHARLES SHI: Well, I think there's a lot of expectation about the Arm being a AI beneficiary. I mean, specifically generative AI trend that has been driving Nvidia higher and higher this year, right? But we have been having this view that Arm, their exposure to generative AI despite all the talks remains quite small. And it remains to be seen whether they can actually benefit from generative AI going into the future.

It has been the trend over the past year that a company with a tiny little bit of a generative AI exposure get treated as a AI story and a stock went higher. And while the valuation definitely is a head-scratcher to us.

- And so, Bob, I want to bring you in here as well. I mean, ultimately, Arm has been a punch of the fanfare, at least the new kid on the block while Nvidia has been, of course, that the decades-old now at this point story that's continued to grow up and get to that trillion dollar market cap valuation quicker than we've seen of any company at this point. So what is it going to take in terms of both of these companies securitizing their own market share at the same time looking at an industry where there's plenty of demand that's come forward?

BOB O'DONNELL: Well, I mean, here's the thing, Brad, I think Arm has been the most unappreciated company in tech for a very long time. I mean, think about it, Apple, Samsung, Amazon, Google, everybody you can think of in tech, Nvidia, of course, as well uses their technology. And they've just been there in the background for such a long time.

And now, of course, they're getting this association with AI, and it's true. I mean, right now, they are not doing a ton directly in AI. There's a lot of opportunity down the road. But remember, their people license their technology, they're creating the cause of a lot of these chips.

Remember, Nvidia wanted to buy Arm because they knew how critical the technology was and people in the tech industry kind of revolted and said, no, we don't want that to happen. But now, the entire market I think is starting to recognize that.

So to me, a lot of this is a reflection of people finally kind of understanding Arm, what they do, what they're capable of. And yes, I think down the road, you will see them be able to drive generative AI. And they're going to be-- they're in automotive, they're in so many other places as well that people haven't really thought about before.

- And so, Charles, to bring you in here then, what sort of moat do they have then when you think of the competition in this space?

CHARLES SHI: Well, the thing about the moat really is they are very strong in mobile, right? No doubt about it. They're dominant. There's almost no competition on mobile for them. Data center, that's what they think. There can be some tailwind behind them.

But the thing is there's Intel, there's AMD, there's x86 in the more as a more incumbent has been established, all the software ecosystem built around them. And then you got a RISC-V, the new competing instruction set architecture competing for them as a free open source.

So I think it's not as straightforward to say Arm has a wide moat and they're definitely going to win the future. I think they will have their place. But I mean, expectation once again, I think is very, very high at this point.