Arm Holdings has hired Amazon's AI chip director Rami Sinno to lead its efforts in developing complete chips, marking a strategic shift from its traditional role of designing processor architectures to building entire chips.

Sinno's background includes creating AI accelerators at AWS, such as Trainium and Inferentia, which enhanced training speed and energy efficiency, reducing reliance on external vendors like Nvidia.

This move to develop in-house chips is part of Arm's broader strategy to expand beyond licensing, aiming for greater control over chip design and production.

Currently trading at a lower valuation than Nvidia, with a forward P/E of 18x, Arm's stock could potentially rise from $85 to $120 if it achieves a 25% annual revenue growth through 2027, making it an attractive long-term investment despite near-term volatility.

For investors, Arm presents a high-conviction long-term opportunity, with potential catalysts like new AI chip deployments and strategic partnerships, although risks include product delays and regulatory scrutiny.

The transition into full chip manufacturing carries risks such as alienating existing clients like Apple, Qualcomm, and Amazon, and competing directly with industry giants like Nvidia and Google, but the potential $100 billion AI chip market by 2030 makes the gamble worthwhile.

Key challenges for Arm include managing conflicts of interest, executing complex R&D projects, and competing in a saturated AI chip market, but successful execution could allow it to capture a significant share of the $50 billion AI training chip market.

Arm, primarily owned by SoftBank, earns revenue through royalties on chips sold by its customers, which has historically powered most smartphones and significant data center chips.

Arm's push into full chip development is partly driven by competition from Nvidia and the need to produce more cost-effective, high-performance AI chips.

Until now, Arm has mainly designed processor architectures licensed to companies like Apple and Nvidia, powering most smartphones and data center chips, but has not built its own chips.

In July, Arm announced plans to invest profits into creating its own chips and components, exploring chiplets and complete systems, signaling a strategic shift.

This move reflects a broader industry trend of major tech firms investing in specialized chips to support AI and machine learning workloads.

Arm's plans to expand into full chip design were revealed through sealed exhibits from a December trial and recent executive hires from rivals, including HPE, Intel, and Qualcomm, to bolster its in-house capabilities.