Arm’s (ARM) AI Potential is Enormous, But So is the Stock’s Lofty Valuation

Stock (Symbol)

Arm (ARM)

Stock Price

$158

Sector

Data is as of

Expected to Report

Company Description

Arm Holdings plc is a semiconductor intellectual property (IP) company.

The Company develops and licenses IP for various devices worldwide, and it provides development tools that accelerate product development, from sensors to smartphones to servers.

Its central processing unit (CPUs) and nomenclature for properties and units (NPUs) include Cortex-A, Cortex-M, Cortex-R, Neoverse, Ethos and SecurCore.

It provides processor IP, offering a range of cores to address the performance, power and cost requirements of every device, from Internet of things sensors to supercomputers, and from smartphones and laptops to autonomous vehicles.

Its graphics and camera technology drives the visual experience across a range of devices, including mass-market to high-performance smartphones, Android OS-based tablets, and digital televisions.

It provides foundation physical IP and processor implementation solutions to address the performance, power and cost requirements for all application markets. Source: Refinitiv

Sharek’s Take

• We expect demand for Arm-based compute to continue across all market segments, especially as AI is deployed in virtually all applications.
• All this extra compute requires increased performance with less power consumption.
• All the amount of compute to run these couples AI workloads is increasing exponentially, the amount of energy required will increase too.
• Arm’s data center customers are reporting substantial performance-per-watt savings.
• Google recently announced its Arm-based Axion product; 50% better performance and up to 60% better energy efficiency.
• NVIDIA announced their Grace Blackwell Superchip, combining the Blacksmith GPU with an Arm-based Grace CPU, providing significant power savings compared to running a GPU alongside an older server chip.

Arm architects, develops and licenses energy-efficient CPU products and technology for semiconductor and Original Equipment Manufacturers (OEM) to develop products. Arm was founded in 1990 as a joint venture of Acorn Computers, Apple, and VLSI technology. The goal was to develop a processor with: High performance, Power efficient, Easy to program, Readily scalable. Arm was instrumental in the evolution of mobile phones into smartphones. Today, Arm CPUs run the vast majority of the world’s software, including the operating systems and applications for smartphones, smartwatches, tablets, PCs, drones, automobiles, and data centers (source: Company Prospectus). Management estimates it has around 50% market share. The company also has partnerships with third party hardware and software companies, including app developers and game engine vendors. Organizations build prototype chips to using Arm’s vast chip design portfolio of technology and tools. Arm licensing fees give the company economies of scale allowing the company to charge each license only a fraction of what it would cost to build internally.

Licensing Technology:

• Arm Flexible Access:
  • For startups and small to medium sized businesses.
  • Low-cost access to Arm’s most popular technology.
  • Membership fees for access to the technology and services in the package.
  • Create different concepts to compare, such as one optimized for cost and another with more features, before having to pay a license fee.
  • Per product license fees are due at tape out (the final stage of the design process) before they are sent out to the fabrication facility for manufacturing.
  • Per unit royalty fee,
• Arm Total Access.
  • For large organizations in different industries, contract basis.
  • Subscription fee for the technology with manufacture rights.
  • Access to the widest range of IP products to design and get to market quickly.
  • Organizations can have several different products in development.
  • Includes support and training.
  • Per unit royalty fee.

Arm is growing rapidly, but the stock is super expensive. The P/E is 101 and the shares sell for 41x this year’s revenue estimate. Still, the shares are red-hot, with heavy accumulation happening right now. Part of the reason the stock is so high is there is little shares to buy, as SoftBank owned 90% of the shares in February 2024. ARM is on the radar for the Growth Portfolio.

One Year Chart

ARM hit an All-Time high on today on news the stock will be added to the NASDAQ 100. But to me, this looks like the stock is making a double-top, and should head lower. A lot of my thinking is due to the high valuation.

The Est. LTG is a solid 30%.

The P/E is 101. Wow, that’s very high.

Qtrly profit growth was great last quarter because the company lost money a year ago. So don’t get too excited about +999%.

Earnings Table

Last qtr, Arm delivered a profit (EPS) of $0.36 per share and beat estimates of $0.30.

Revenue growth, geographically speaking, was:

• License and other revenue +60%, 45% of company revenue. Multiple new agreements and increased demand for AI, datacenters, and edge computers.
• Royalty revenue +37%, 55% of total revenue. Strong software sales and Arm V9 adoption in smartphones and marker share gains in auto and cloud hyperscalers.

Revenue growth was strong due to a high number of long-term licenses. Chip shipments were down 10% from a year ago. Internet of Things (IoT) chips are high volume but low value, so the decline wasn’t a big deal.

Annual Profit Estimates are for earnings to grow 24% this year, 30% next year, and 23% the year after. 

Qtrly Profit Estimates are for 42%, -22%, 28%, and 58% profit growth in the next 4 qtrs. For next quarter, analysts expect revenue to grow just 1%. Looking further out, analysts expect 35%, 75%, 46% and -2% profit growth 5 to 8 qtrs out (not shown).

Fair Value

M

Still, the stock is WAY more expensive than I anticipated. The P/E is 101. Gosh.

Investors must feel there’s a LONG runway of growth ahead.

ARM has a Fiscal Year end on March 31. So the company is in Q1 now. And STILL the stock sells for 41x this year’s annual revenue estimate. Note I’m calling this year Fiscal 2024 as it has 9 months in calendar year 2024.

Bottom Line

Power Rankings

N/A

Aggressive Growth Portfolio

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Conservative Stock Portfolio

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