Friday Feb 9 2024 10:21
4 min
Arm Holdings stock continued to shine on Thursday, rocketing up 50% higher as a number of analysts revised their targets on an optimistic outlook for the UK-based chip designer.
Positive sentiment about the company’s earnings and future prospects have propelled optimism on Wall Street, with the S&P 500 index touching the record 5,000 mark briefly yesterday, but failing to close above that level. Several analysts have pointed to the firm’s strong points in revising their Arm stock price forecasts.
Arm Holdings PLC's licensing segment, often overshadowed by its lucrative royalty business, is garnering increased attention for its potential, as pointed out by Guggenheim analyst John DiFucci.
“The royalty revenue line is the focus of investors — for good reason,” DiFucci wrote in a note to clients late Wednesday. The business, which “is the primary driver of profit,” grew revenue 11% in the latest quarter to $470 million, beating expectations.
“Royalties are the wonderful part of this financial model with margins that are unheard of in other legal endeavors,” DiFucci continued. “Royalties are what will likely drive future free cash flow and the ultimate valuation of the stock.”
He stressed the link between current licensing agreements and future royalty earnings, noting an 18% rise in license revenue despite challenging comparisons. DiFucci anticipates further growth in this area in the upcoming quarter.
DiFucci also highlighted Arm's significant presence in the artificial intelligence (AI) arena — a sector where many claim leadership but few have demonstrated financial success. DiFucci remains bullish on Arm stock, raising his price target from $74 to $93 and maintaining a Buy recommendation.
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TD Cowen's Matthew Ramsay drew attention to Arm's advancements with its ARMv9 architecture, which is contributing increasingly to the company's royalty revenue.
“We were well aware v9 would generate higher royalties, but a doubling of royalties for similar-tier chips was higher than anticipated and means the company achieving or surpassing financial estimates discussed at the IPO [is] much more achievable,” he wrote.
Ramsay added that “all-you-can-eat subscription licenses from key customers continue to ramp in the mix, which should add visibility to licensing revenue over time.”
The TD Cowen analyst has an Outperform rating on the stock and boosted his price target to $95 from $80 overnight.
Rosenblatt analyst Hans Mosesmann emphasized the dual drivers of AI and the ARMv9 architecture for Arm's growth, raising his price target to $140 from $110 and reaffirming a buy rating.
“Calendar-year visibility is strong on further v9 mix shift (now only 15% of royalties) and broader non-mobile share gains,” he wrote. “Arm is a primary beneficiary in our view of a secular AI trend that moves inference workloads to the edge from current cloud-centric concentration.”
Arm shares, trading via American Depositary Receipts (ADRs) on the Nasdaq, closed up 47.89% on Thursday.
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