Arm Holdings’ Price Target Raised at Mizuho Securities

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.

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.

Mizuho Securities analysts increased the price target for Arm Holdings (NASDAQ:ARM) from $62.00 to $75.00, while maintaining their Buy rating. The analysts highlighted Arm Holdings as a significant semiconductor IP provider, benefiting from trends in processor efficiency and AI.

The analysts pointed to Arm's Total Compute Solution platform, offering new opportunities in partnerships with Chinese handset OEMs and potential developments with Samsung's Exynos 2400 expected in late 2024.

Additionally, new AI Compute Custom ARM silicon, like the Cobalt series and NVDA's Grace, is expected to contribute positively to Arm's growth into 2024-2025.