Shares of Arm Holdings PLC are trading only 6% above their initial-public-offering price, but analysts see far more upside for the chip-design name.
A number of analysts initiated coverage of Arm’s stock
ARM,
Monday after the waiting period ended for underwriting banks to do so. The new ratings were largely positive, according to FactSet, as at least seven analysts launched coverage with buy-equivalent stances, while two began coverage at the equivalent of hold.
“Many things have changed for Arm since it was acquired by Softbank in 2016, but much remains the same… we view both positively for new Arm’s investment case,” Citi Research analyst Andrew Gardiner wrote in a note to clients titled: “Same as the old Arm, only better.”
He noted that Arm, which went public in mid-September, “has long been dominant in mobile, but can now benefit from providing additional content at higher prices into a mature market.” Additionally, he said he sees evidence of “long-awaited” market-share gains in servers.
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“These factors lead to Arm growing sales faster…and with the potential for greater operating leverage than during its prior incarnation…thereby supporting higher valuation,” Gardiner wrote, setting a buy rating and $65 target price on Arm’s stock. He said he sees the potential for an 18% compound annual growth rate on sales into fiscal 2027, as well as the possibility of a 36% compound annual growth rate on earnings per share.
Rosenblatt analyst Hans Mosesmann set a $85 price target on Arm shares, with that target representing 57% upside from Monday’s close. He set a buy rating on the stock as well.
“Arm is poised to ride strong secular growth trends in edge computing, AI, automotive, and IoT,” Mosesmann wrote, referring to the Internet of Things, or the proliferation of new connected devices.
“An important dynamic for investors to consider is ARM’s deep and broad multi-decade customer and ecosystem presence, which is ideal for the shift of AI as a Cloud-centric technology (CPU/GPU compute) to an Edge-centric technology (CPU/bespoke accelerators) where cost, reliability, latency, and security play an outsized role,” Mosesmann continued.
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Guggenheim Securities analyst John DiFucci was bullish as well. “We spend most of our time focused on what investors often view as the most exciting sub-sector (software) within the most exciting sector (technology), but we’re often reminded what the source of all innovation is in technology: semiconductors,” he wrote.
Chip advancements help software and internet players drive value for customers, and Arm is the “foundation” for semiconductor innovation, in his view.
“Arm employs a very attractive business and financial model to address a large and growing revenue [total addressable market] of $24.4B today for its current products alone, and with options to expand its breadth further,” he wrote. DiFucci said he also sees strong visibility into the company’s growth potential for the next several years.
“There are certainly risks, some of which all companies face (macro) and some of which are unique to Arm, including Arm China revenue concentration (24% in FY23), but we believe this risk is more than offset by the opportunities it offers to address the most populous country in the world (according to the US Census Bureau, July 2023) with one of the fastest growing economies,” DiFucci added, as he slapped a buy rating and $64 target price on shares of Arm.
JPMorgan’s Harlan Sur called out top-line visibility as well. “The team has 90%+ visibility on customer chip design programs and therefore two- to three-year visibility on royalty rates/per chip, which, combined with three-year visibility on its licensing business, drives strong predictability on its total revenue profile,” he wrote.
Sur said he thinks that Arm boasts “strong competitive advantages” stemming from its scale in research and development and its compelling developer ecosystem, among other factors. He began coverage of the stock with an overweight rating and $70 price target Monday.
BMO Capital Markets analyst Ambrish Srivastava was more measured, however.
“While we are very positive on the company, its technology, and its almost critical place in the semiconductor and broader technology ecosystem, we find shares reasonably valued at current levels/valuations, with a balanced reward to risk profile,” he wrote.
Srivastava flagged “healthy” debates over Arm’s business. “The new debate is whether Arm’s new strategy of developing market-specific IP [intellectual property] vs. general purpose CPUs, thus hollowing out its customers’ own value add, and its new subscription-based licensing approach will be successful,” he noted, though he thinks the company’s pivot will pan out.
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This story originally appeared on Marketwatch
