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On Thursday, Bernstein analysts maintained their Underperform rating on Arm Holdings (NASDAQ:ARM) stock, with a steady price target of $100.00. The semiconductor company, now commanding a substantial $182.1 billion market capitalization, reported third-quarter fiscal year 2025 revenues at a record $983 million, surpassing guidance and expectations. According to InvestingPro data, ARM currently trades at premium multiples with a P/E ratio of 227x, suggesting the market has high growth expectations for the company. Licensing deals contributed robustly, including one additional ATA agreement. Royalties exceeded forecasts at $580 million, a 23% year-over-year increase, while non-royalty revenues, primarily from licensing, rose 14% year-over-year to $403 million. Adjusted operating margin outperformed at 45%, and adjusted diluted earnings per share were strong at $0.39.
Despite these positive results, Bernstein noted that the adoption of Arm’s v9 technology remained at 25% of royalties for the third consecutive quarter, below the company’s targeted 40% by the end of FY25. Although v9 royalties grew, v8 royalties also increased unexpectedly, keeping v9 penetration levels stable. The company maintains strong financial health with a current ratio of 4.52 and operates with minimal debt, as revealed by InvestingPro’s comprehensive analysis, which shows an impressive gross profit margin of 96%. Annual Contract Value (ACV) matched expectations at $1.27 billion, up 9% year-over-year, while Remaining Performance Obligations (RPO) declined 3% from the previous quarter to $2.3 billion, with 28% due in the next twelve months. Revenue from related parties, primarily from China, represented 29% of total revenue, an increase from previous quarters.
Arm Holdings continues to expand its workforce, with engineering headcount up 19% year-over-year. Q4 guidance was set at approximately $1.23 billion for revenues, aligning with consensus but slightly lower in earnings per share at $0.52 compared to the $0.53 consensus. The full-year revenue forecast was marginally raised to a midpoint of $3.99 billion, with earnings per share guidance also increased to $1.60.
The company’s long-term growth narrative, particularly in AI, CSS, and the broader ecosystem, is reportedly still unfolding, with a strategic emphasis on research and development spending. However, Bernstein suggests that despite the improved full-year guidance, investor response may remain subdued due to the stock’s strong valuation and potential cyclical headwinds. Based on InvestingPro’s Fair Value analysis, ARM appears to be trading above its intrinsic value. Investors seeking deeper insights can access ARM’s comprehensive Pro Research Report, which is part of InvestingPro’s coverage of over 1,400 US stocks, offering detailed analysis of financial health, valuation metrics, and growth prospects.
In other recent news, Arm Holdings has been in the spotlight with analysts from Barclays (LON:BARC), Citi, and Goldman Sachs maintaining positive outlooks on the company. Barclays analyst Tom O’Malley acknowledged the company’s improved financial year figures, driven by strong performance in Data Center, Networking, and Internet of Things (IoT), and a record-breaking March in Licensing. Citi analyst Andrew Gardiner increased the price target for Arm Holdings, highlighting the company’s momentum in various segments, particularly in artificial intelligence (AI). Goldman Sachs also raised its price target for Arm Holdings, noting the company’s solid financial performance in the third fiscal quarter.
These recent developments come amid Arm Holdings’ involvement in the AI ’Stargate’ projects and SoftBank (TYO:9984)’s continued investment in the company. CEO Rene Haas’s comments about the company’s role in the Stargate projects and SoftBank’s commitment to its stake in Arm Holdings have stirred investor interest.
However, Bernstein expressed concern over the valuation of Arm Holdings, which is trading at a high price-to-earnings ratio compared to its peers. Despite Arm’s strong performance and improved royalty rates, Bernstein is cautious about the sustainability of its licensing-focused guidance for FY25 due to ongoing cyclical challenges.
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