Oddo BHF Upgrades ARM Holdings to Outperform

Arm Holdings (NASDAQ:ARM) shares rose more than 4% intra-day today after Goldman Sachs analysts raised their price target for the company to $143 from $110, while maintaining a Buy rating on the stock.

The analysts expressed increased confidence that Arm will continue to be the preferred architecture for most product categories at the Edge and increasingly in Data Centers. In a world with growing power constraints, they anticipate Arm will gain market share in Server CPUs due to strong momentum with existing customers like AWS (Graviton) and Nvidia (Grace), as well as early success with new customers such as Microsoft (Cobalt) and Google (Axion).

The analysts' positive investment outlook is based on the expected proliferation of Arm-based processors across various cloud platforms and the transition from the v8 to v9 architecture, which involves higher royalty rates. This transition is projected to drive sustained margin expansion and earnings growth.

The analysts forecast a three-year revenue and non-GAAP EPS (excluding SBC) compound annual growth rates (CAGR) of approximately 24% and 30% through 2027, respectively, which significantly exceed the median growth rates within the Semiconductor and Semiconductor Capital Equipment sectors.

On Wednesday, May 29, 2024, CICC initiated coverage on NASDAQ:ARM with a grade of Market Perform, setting a neutral tone for the company's stock outlook. This evaluation came at a time when ARM's stock was priced at $120.65, as highlighted by TheFly. ARM Holdings, known for its semiconductor and software design, plays a crucial role in the tech industry, particularly in the smartphone sector. Its competitors often include other major chip manufacturers and tech companies that are also vying for dominance in the AI and mobile computing space.

ARM Holdings has recently made headlines with its introduction of new chip designs and software tools aimed at boosting the AI capabilities of smartphones. This innovation, coupled with changes in how these technologies are delivered, is expected to hasten their market adoption. Such advancements are critical as they underline ARM's commitment to maintaining its competitive edge in the rapidly evolving tech landscape. This move could potentially influence ARM's market performance and investor sentiment, aligning with CICC's Market Perform rating.

Furthermore, ARM's unveiling of a new computing platform designed to enhance AI functionalities in mobile devices marks a significant stride in the tech industry. This development, aimed at broadening the reach of advanced AI features across a wider array of mobile devices, could revolutionize user experiences and expand device capabilities. This strategic focus on AI could play a pivotal role in ARM's future growth and market position, reflecting the insights behind CICC's analysis.

Despite these promising developments, ARM's stock has experienced a downturn, with a decrease of $4.29 or approximately 3.43%, bringing the stock price to $120.65. This decline occurred within a trading range between $119.05 and $123.7. Over the past year, ARM's shares have fluctuated significantly, with lows of $46.5 and highs of $164. The company's market capitalization stands at roughly $125.52 billion, showcasing its substantial presence in the market despite recent stock price volatility. This financial snapshot provides a broader context to CICC's Market Perform rating, suggesting a cautious optimism towards ARM's stock amidst its innovative strides in AI and mobile computing.

Arm Holdings (NASDAQ:ARM), a subsidiary of SoftBank Group, saw its shares rise by more than 6% intra-ay today after announcing that it is planning to enter the AI chip market as part of CEO Masayoshi Son's strategy to transform the conglomerate into a dominant force in artificial intelligence.

A report from Asia Nikkei indicates that Arm Holdings intends to create a new division specifically for AI chips, with goals to develop a prototype by spring 2025 and to begin mass production by fall 2025 through contract manufacturers. This move is a component of SoftBank’s larger plan to invest 10 trillion yen ($64 billion) in AI technologies.

Arm currently leads the smartphone processor architecture market, commanding over a 90% share. Owned predominantly by SoftBank, which holds a 90% stake, Arm will cover the initial development costs, expected to be in the hundreds of billions of yen. SoftBank will also provide financial support for this project. There is a possibility that the AI chip business could eventually be spun off into a separate company under SoftBank once it reaches the mass production stage.

ARM Holdings (NASDAQ:ARM) shares dropped more than 8% pre-market today after the company announced annual revenue guidance that did not meet expectations, despite reporting better-than-expected results for its fiscal fourth quarter, largely driven by increased licensing revenue amid a surge in enterprise AI spending.

In Q4, the chip designer reported adjusted earnings of $0.36 per share on revenue of $928 million, surpassing Wall Street's expectations of $0.21 per share on revenue of $780.2 million. The company highlighted a 60% increase in license revenue to $414 million year-over-year, attributed to multiple high-value license agreements as companies escalate their investment in ARM-based technologies for AI across various markets.

For the first quarter, ARM guided adjusted earnings per share between $0.32 and $0.36 and revenue between $875 million and $925 million. This guidance exceeds analyst expectations, which anticipated earnings per share of $0.31 and revenue of $864.4 million. Looking ahead to the full year 2024, ARM expects adjusted earnings per share to range from $1.45 to $1.65, compared to the analyst estimate of $1.53. The company forecasts annual revenue between $3.8 billion and $4.1 billion, with the midpoint at $3.95 billion, slightly below the anticipated $3.98 billion.

Rosenblatt analysts adjusted their price target for Arm Holdings (NASDAQ:ARM) upwards to $180.00 from $140.00, continuing to recommend a Buy rating. Currently, Arm shares are up more than 9% intra-day.

The analysts shared insights from a recent visit to Cambridge, where they gained further confidence in the company's trajectory. The analysts noted an acceleration in royalty trends, driven by more strategic and increasingly AI-focused licensing agreements. This acceleration is expected to boost royalty rates to double digits by the end of the decade, a significant increase from the current mid-single digits, and sooner than previously anticipated. This shift is projected to alter the company's revenue model, with royalties making up over 80% of its income.

The analysts believe that Arm's price-to-earnings (P/E) ratio can sustain levels above 50% due to the secular changes and royalty increases, estimating a royalty rate of ~10% by the decade's end or earlier.

Shares of Arm (NASDAQ:ARM) experienced a dramatic surge of 47% on Thursday after the company, renowned for its chip design, raised its annual guidance. This update comes as royalty and licensing revenues see a significant boost from the escalating demand for artificial intelligence (AI).

In what is only its second earnings disclosure since its public debut in September, Arm highlighted its anticipation for future growth to be propelled by the increasing need for more energy-efficient computing and AI capabilities.

For its fiscal third quarter, Arm reported adjusted earnings of $0.29 per share, alongside revenue of $824 million. These figures surpassed Wall Street's expectations, which had forecasted an EPS of $0.25 on revenue of $761.6 million.

Looking forward, Arm set its adjusted EPS guidance to between $1.20 and $1.24, with revenue expectations ranging from $3.16 billion to $3.21 billion. This outlook marks an increase from previous forecasts, which anticipated an adjusted EPS between $1 and $1.10, on revenue estimated to be between $2.96 billion and $3.08 billion.

For the current quarter, Arm is predicting an adjusted EPS of $0.28 to $0.32, with projected revenue falling between $850 million and $900 million. These projections notably exceed analyst estimates, which had estimated the EPS at $0.21 on revenue of $780.3 million.