On Thursday, Evercore ISI increased its price target on shares of Arm Holdings (NASDAQ:ARM) to $176 from $173, while keeping an Outperform rating on the stock. The firm cited the transition to the new V9 architecture and the initiation of Compute Subsystem Services (CSS) as key drivers of royalty revenue growth for the next three years or more.
Arm Holdings, a leading semiconductor and software design company, is poised for growth as it continues to see the V9 architecture account for a quarter of its royalty revenues. This figure has remained consistent quarter over quarter, bolstered by a strong mid-range smartphone market that predominantly uses the older V8 architecture.
The company anticipates that the adoption of V9 will increase over the subsequent quarters, leading to higher royalties as chip performance within the V9 sub-generations improves.
Moreover, Arm Holdings expects to see the first CSS revenues contribute to its financials in the second half of fiscal year 2025. This new revenue stream will come from its first two customers, Microsoft (NASDAQ:MSFT) with the Cobalt CPU and MediaTek with smartphone chips, as they begin to scale up unit production.
Evercore ISI projects that CSS will account for approximately 2% of Arm Holdings' revenues in the fourth fiscal quarter but will grow to a high single-digit percentage by fiscal year 2026. The firm has reiterated its Buy rating and expresses a bullish stance on the company, highlighting Arm's advantageous position to benefit from three secular growth drivers.
The revised price target of $176 is based on a 2.2 times 2027 Price/Earnings to Growth (PEG) Ratio, reflecting a 29% three-year earnings per share (EPS) growth. This translates to a Price/Earnings (P/E) ratio of 65 times the estimated calendar year 2027 EPS of $2.99, discounted back one year at a 10% rate.
In other recent news, Arm Holdings has been the center of attention due to a series of events. The company reported a 39% year-on-year revenue growth, primarily driven by licensing and royalty revenue from AI applications and smartphone segments. Arm Holdings maintains its revenue guidance for the fiscal year between $3.8 billion and $4.1 billion.
Analyst firms have provided mixed reviews. Deutsche Bank (ETR:DBKGn) raised the price target for Arm Holdings to $125, maintaining a Hold rating. Barclays (LON:BARC) increased the price target to $145, keeping an Overweight rating. Bernstein SocGen Group, however, downgraded the stock rating to Underperform due to concerns about revenue prospects outside of the AI segment. Citi sustained its Buy rating on Arm amidst a legal dispute with Qualcomm (NASDAQ:QCOM).
Rosenblatt has a positive outlook on Arm, emphasizing the company's recent expansion of the Arm Total (EPA:TTEF) Design program and projecting significant royalty revenues. Moreover, Arm announced the appointment of industry veteran Young Sohn to its board of directors.
Other firms like Morgan Stanley (NYSE:MS), Loop Capital, and TD Cowen reaffirmed their positive ratings on Arm, highlighting the company's potential in the AI and mobile device sectors. These are recent developments that investors should consider.
InvestingPro Insights
Arm Holdings' strong market position and growth potential, as highlighted by Evercore ISI, are reflected in several key metrics from InvestingPro. The company's revenue growth of 31.37% over the last twelve months and 39.11% in the most recent quarter underscores its robust performance, aligning with the anticipated growth from V9 architecture adoption and CSS revenues.
InvestingPro Tips indicate that Arm is trading at high valuation multiples across various metrics, including earnings, EBIT, EBITDA, and revenue. This premium valuation suggests that investors are pricing in significant future growth, consistent with Evercore's bullish outlook. Additionally, the tip noting Arm's strong return over the last three months (with a 35.1% price total return) corroborates the market's positive sentiment.
It's worth noting that while Arm's growth prospects are promising, investors should be aware of its high P/E ratio of 362.48, which indicates the stock is priced for substantial future earnings growth. For a more comprehensive analysis, InvestingPro offers 14 additional tips for Arm Holdings, providing deeper insights into the company's financial health and market position.
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