British chip designer Arm Holdings plc (ARM) has surfed the artificial intelligence (AI) wave, riding a tsunami of success since its public trading debut last September. On day one, shares catapulted an astounding 25%. Arm has snatched the spotlight in the AI landscape, with tech titans like Advanced Micro Devices (AMD), Apple (AAPL), Broadcom (AVGO), Nvidia (NVDA), Qualcomm (QCOM), all turning to its groundbreaking chip designs.
At the recent Computex 2024 event, Arm seized the headlines by projecting 100 billion AI-ready devices to conquer the tech terrain by the end of 2025. In addition to this optimistic outlook, the company swiftly claimed a spot in the Nasdaq-100 Index, only 10 months after its IPO, showcasing its meteoric rise in the global tech universe.
While Arm has dazzled investors this year, with shares soaring over 90% year-to-date, the crucial question surfaces: can this electrifying rally persist? An analyst sees a green light ahead. Now, let’s delve into the reasoning behind this bullish forecast.
Arm Holdings Stock Overview
Arm Holdings plc (ARM), headquartered in Cambridge, UK, boasts a rich legacy of over 30 years in spearheading power-efficient CPU design. Evolving from its roots as a battery-focused computer architect, the company has morphed into a frontrunner in ultra-efficient compute platforms. Today, Arm’s cutting-edge technology propels the next wave of smart, AI-driven, and immersive experiences across a spectrum from sensors and smartphones to vehicles and data centers.
Renowned for computing innovation, Arm offers high-performance, cost-effective, and energy-efficient IP solutions for CPUs, GPUs, NPUs, and interconnect technologies. Valued at a robust market capitalization of around $156.3 billion, the stock hit an all-time high of $188.75 earlier this month, riding high on the fervor surrounding its AI breakthroughs.
Despite a slight pullback, Arm has turned heads in 2024. With shares up over 96%, leaving the broader S&P 500 Index and NASDAQ-100 performance in the dust. Over the last six months alone, the stock has surged a remarkable 106%.
Illustrating the robust investor interest, Arm’s shares aren’t exactly a steal. Trading at 192.41 times forward earnings, the stock stands well above its industry peers. Yet, despite valuation qualms, the growth trajectory for ARM stock sparkles with allure.
Arm’s Resilience in Q4 Earnings
Arm’s fiscal Q4 earnings outclassed estimates, witnessing a post-earnings drop due to its fiscal 2025 outlook missing analyst expectations. Despite the stumble, Arm’s total revenue surged to $928 million, a mighty 46.6% year-over-year leap, outpacing estimates by 5.7%. Additionally, the company’s adjusted EPS of $0.36 signaled a substantial improvement from the prior year, impressively exceeding projections by 17.7%.
Licensing revenue shot up 60% year-over-year to $414 million, propelled by lucrative new contracts and burgeoning demand for its energy-efficient AI tech in data processing. Meanwhile, royalty revenue skyrocketed 37% annually to $514 million, driven by the increasing adoption of its recent high-margin Armv9-based chips.
Although Arm’s fiscal 2025 guidance failed to hit analyst marks, the tug on the stock’s reins, the real test lies ahead. For the fiscal year, revenue is anticipated to range between $3.8 billion and $4.1 billion, with adjusted EPS pegged between $1.45 and $1.65. Despite its revenue forecast falling shy of Wall Street’s projections, excitement looms large.
Arm is poised to unveil its fiscal 2025 Q1 earnings results this Wednesday, July 31.
Analyst Expectations for Arm Holdings Stock
Morgan Stanley (MS) raised the bar, upgrading its rating on Arm from “Equal-Weight” to “Overweight,” setting a fresh Street-high price target of $190. The upgrade hinges on the tech giant’s transition into edge computing as AI infiltrates consumer devices and myriad applications, projecting Arm’s serviceable addressable market galloping past $14 billion by 2027.
Morgan Stanley’s bullish forecast touts Arm’s expanding market presence, supported by its illustrious clientele base. Despite the dip in confidence post-May, the investment behemoth views it as a strategic understatement, prepping Arm for a triumphant rebound.
Furthermore, whispers of a surge in Apple’s iPhone shipments could play a vital role in Arm’s journey. The market seems to have overlooked the impending rollout of Arm’s Compute Subsystems from 2025 onwards.
“All told we think these developing edge AI opportunities have explained some of the share price movement year to date, but our assessment of the true serviceable addressable market of each, along with the likelihood of Arm capturing more functionality on the CPU, we think there is more upside in the Arm story,” expressed Morgan Stanley analysts.
As per consensus ratings, ARM stock holds a “Moderate Buy.” Out of the 23 analysts in the fray, 14 beckon a “Strong Buy,” while eight suggest a “Hold,” and one stands firm on a “Strong Sell.” The stock dances above its average analyst price target of $127.90. However, Morgan Stanley’s revised target of $190 hints at a 29.5% rally potential for ARM stock.