Last week, a UK semiconductor designer ARM (US: ARM) Its shares are listed in the United States. The next day, German sandal company Birkenstock announced it would do the same.

This comparison may seem strange, but Arm’s design and Birkenstock sandals have a lot in common. Both were imported from Europe to California, before they became part of everyday life. Both have strong intellectual property and are more environmentally friendly than their peers. But based on stock market valuations, one is considered to have much stronger prospects than the other.

Arm designs microprocessor architectures and then licenses them to customers, most famously Apple (US: APPL). Steve Jobs chose the Arm architecture for the original iPhone because it was more power efficient than the x86 architecture he used Intel (US: INTC). The iPhone became a global phenomenon and has been driving Arm’s growth ever since. The problem is that the smartphone market is stagnant.

Apple’s iPhone revenue fell 2 percent year-over-year in the latest quarter. In contrast, Arm’s revenues were flat last year. Over a two-year period, sales increased by 32 percent, which isn’t bad, but not as good as Birkenstock’s 71 percent sales increase (as the chart below shows).

Fashion comes in waves, and Birkenstock is currently riding the crest of one. Sandalwood was first brought to the United States in the 1960s and sold in health food stores. They were popularized in the hippie community, where comfort was prioritized over style. But like yoga, cannabis, and the Burning Man festival, Birkenstock has moved from the fringes to the center of culture. Now, they can be found on all types of feet, from painters to bankers.

The prevalence of sandalwood is shown in the figures. Between 2020 and 2022, Birkenstock’s revenues increased from €728 million to €1.2 billion while operating profits rose by 181 percent. Last year, operating profit was 29 percent, ahead of Arm’s profit of 25 percent.

Given the German sandal maker’s rapid growth and high margins, investors may be confused about why they should pay more for Arm. After the 25 percent jump in its stock price on opening day, Arm is valued at more than $60 billion, while Birkenstock is seeking a valuation of just $8 billion. That’s an earnings-based valuation of more than 100 times Arm and just 40 times Birkenstock.

The argument made by ARM during its IPO is that the emergence of artificial intelligence has provided a new avenue for growth; A way to get her out of the smartphone slump. There is some evidence that this is the case. Arm’s architecture was recently licensed by Amazon (US: AMZN) And Alphabet (US:GOOGL) To design special chips for their data centers.

Instead of training AI models, where Nvidia (US: NVDA) GPUs are dominant, and Arm’s architecture is expected to be good at effective AI “inference.” Reasoning is like speaking a second language instead of learning it. It takes effort to bring the right words to mind, but most of the heavy lifting has already been done in the classroom. The key is to be able to do it efficiently.

Arm has only made recent inroads into the data center market, and more are expected to come. Incumbents Intel and AMD (US: AMD) Arm has about 90 percent of the market share, according to Counterpoint Research, but Arm has increased its share from 7.2 percent to 10.1 percent in the past two years alone. Amazon and Alphabet also prefer Arm because they can license its architecture but design their own chips, while they have to remove off-the-shelf designs from AMD and Intel.

The rise of AI is moving ARM from the fringes to the mainstream in the data center market. At least, that’s the story investors have bought into.

Birkenstock says it only has 1 percent of the footwear market, and there is still room to grow. But the truth is that not all shoes are the same. An eye test suggests that Birkenstocks are already on trend, and unless they can convince men to wear open toes in the office or buy their new closed-toed products, their growth story is going to be a bit of a stretch.

For Arm to justify its exceptional price, it won’t be able to stay on the sidelines for long. You must quickly move into the mainstream data center before the new architecture overtakes it. Unlike shoes, retro technology is never in fashion.

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