Arm Earnings: Raising Fair Value Estimate to $45 From $34; Shares Remain Highly Overvalued

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.