Company Reports

Wide-moat Arm Holdings’ fourth-quarter results came ahead of FactSet consensus, with $928 million in revenue and $0.36 in adjusted EPS compared with $875 million and $0.30 estimates. However, despite management projecting 22% growth in revenue and adjusted EPS for 2025, the stock took a 9% hit in aftermarket trading as the outlook did not impress investors. At the midpoint of guidance, management expects $3.95 billion in revenue and $1.55 in adjusted EPS in 2025, fairly aligned with our estimates. We believe investors were expecting a stronger 2025 outlook given the high expectations baked into Arm after its 70% share price run since its IPO and its narrative as an AI beneficiary. We are maintaining our $57 fair value estimate and see Arm shares as overvalued and leaving little margin for error. Although shares have declined by 35% since their $150 peak in February, Arm still trades at a 40% premium compared with its peers Synopsys and Cadence on a forward price earnings basis. For more context see our special report, “Blueprint of an Overvaluation: Dissecting Arm's Mispricing.”

Arm Holdings does not sell chips, it develops chip architecture and IP that it licenses to its clients. We believe Arm will remain the dominant architecture in smartphone CPUs, where it has a 99% market share, while maintaining high market share in other mobile chips and battery-powered devices. Arm is also making inroads into the data center, where we expect it will gain market share versus x86, the dominant architecture.

We are raising our fair value estimate for wide-moat Arm Holdings to $45 from $34 based on strong near-term results and higher royalty and licensing revenue assumptions going forward. Our fair value estimate assumes a 13% revenue CAGR over the next decade and GAAP EBIT margins almost doubling compared with 2023, from 25% to 48%. Our fair value estimate increase comes from higher licensing revenue and royalty rates longer term, after management confirmed that the new Arm v9 architecture carries double royalty rates than its predecessor v8. We estimate royalty rates for v9 could be between 3% and 4%, compared with the 1.7% blended rate the firm reported in its IPO filing for 2022. In 2030, we expect most of Arm’s revenue will come from v9, hence implying higher royalty rates for the firm. V9 adoption keeps increasing mainly from adoption in smartphones and the data center, and management sees increased adoption in 2024 and 2025. At the same time, Arm chips continue to see growth from AI as they are used in conjunction with GPUs in the datacenter and to enable on-device AI features in smartphones.

Arm Holdings does not sell chips, it develops chip architecture and IP that it licenses to its clients. We believe Arm will remain the dominant architecture in smartphone CPUs, where it has a 99% market share, while maintaining high market share in other mobile chips and battery-powered devices. Arm is also making inroads into the data center, where we expect it will gain market share versus x86, the dominant architecture.

Arm quarterly results, the first since the IPO, surpassed consensus expectations (FactSet) but shares fell 5% after-hours to the $51 range as the outlook for the next quarter disappointed investors. Management guided for $720 million to $800 million in sales versus consensus expectations of $780 million, and $0.21 to $0.28 adjusted earnings per share, compared with consensus expectations of around $0.28. For the full fiscal year, it expects $2.96 billion to $3.08 billion in sales, in line with our estimates. We have slightly raised our medium-term forecasts, but we are maintaining our $34 fair value estimate and see the shares as materially overvalued. Despite Arm gaining market share—and we expect healthy growth and margin expansion from Arm in the years to come—the current share price has very high implicit expectations.

We initiate coverage of Arm Holdings with a wide moat rating and a $34 fair value estimate, implying an enterprise value to EBIT multiple of 41 and 31 times for fiscal-year 2024 and 2025, respectively. We struggle to justify Arm’s lofty IPO valuation despite its good growth prospects. At Arm’s IPO price debut of $51 per share, the same EBIT multiples would be 59 and 41 times, respectively.

Arm Holdings does not sell chips, it develops chip architecture and IP that it licenses to its clients. We believe Arm will remain the dominant architecture in smartphone CPUs, where it has a 99% market share, while maintaining high market share in other mobile chips and battery-powered devices. Arm is also making inroads into the data center, where we expect it will gain market share versus x86, the dominant architecture.