Can You Buy Stock In ARM?

Since its public debut at around $60 per share, Arm Holdings plc has soared by over 100% and this year alone is up 98%.

After roaring out of the gate from the private markets to the public stock market, and winning over both Wall Street and investors alike, what does the future hold for ARM now?

Is this leading semiconductor intellectual property company that specializes in the design of microprocessor architectures going to continue its upward trajectory or plummet back down to earth?

Can You Buy Stock In ARM?

Yes, you can buy stock in ARM following its initial public offering in September 2023 which followed a period whereby it was owned by SoftBank since 2016.

The reason for the stock’s enormous success is its architectures power over 90% of the world’s smartphones and are increasingly being adopted in data centers, automotive, and Internet of Things devices.

As the backbone of mobile computing, especially in emerging markets, ARM has figured out how to generate a stable revenue stream from both licensing and royalties.

Another reason for investor enthusiasm is that data centers are increasingly becoming a pre-requisite for top tier companies to invest in artificial intelligence and ARM is making significant inroads in a market traditionally dominated by x86 architectures from Intel and AMD.

In a big win for the firm, Amazon Web Services has developed Arm-based processors, Graviton, that offer improved performance-per-watt and cost advantages.

Furthermore, the shift towards autonomous vehicles has increased demand for Arm’s low-power, high-performance processors.

Is ARM an AI Stock?

Beyond data centers, ARM is investing in specialized architectures for artificial intelligence and machine learning workloads. In a world where real-time data processing is crucial, ARM’s energy-efficient designs are well-suited for edge computing.

It’s hard to overstate the power of the company’s business model in tapping into AI opportunities and more broadly mobile devices at large. The company’s business model revolves around licensing IP to a vast array of companies, including tech giants like Apple, Samsung, and Qualcomm.

With such a diversified customer base of technology giants, ARM can in some ways be viewed as a hub where the technology giants are spokes. It also makes it tremendously challenging for any competitors to dislodge it or its architectures.

Nevertheless, competition is rising from open-source RISC-V architecture, an alternative to ARM. The open nature has been crucial in attracting companies looking to reduce licensing costs as well as to increase customization, and indeed traditional competitors are innovating to regain market share, which may well impact ARM’s growth in data centers.

The Investment Case For ARM

The proliferation of connected devices has been a key driver for ARM and led to management reporting consistent revenue increases. Over the past four quarters, revenues have been increasing year-over-year by rapid amounts, such as the 39.1% posted last quarter.

Better still, the asset-light licensing model results in high gross margins, which in turn contribute very positively to profitability. To give you just a glimpse of what a good model ARM has, gross margins last quarter came in at an astonishing 96.5%.

And the IPO led to a capital infusion that supports further R&D and innovation to sustain its market lead. Turning our attention to the balance sheet, cash and equivalents now stand at over $2.4 billion when factoring in both cash and short-term investments.

Is ARM Stock Cheap?

With all those positives to point to, it’s hard to say that ARM appears cheap on a valuation front. The market capitalization is over $130 billion while revenues sit at just $3.497 billion. The price-to-earnings ratio is an eye-popping 338x.

With such lofty valuation figures, you might imagine that forecasted growth rates are sky high too, and you would be right. Revenues over the next 5 years are expected to rise at north of 20% annually while net income is expect to climb at an astonishing 69.4% per year.

Given that ARM stands at a pivotal point, where it can go aggressively after opportunities beyond mobile devices into data centers, automotive, and IoT sectors, the firm’s licensing model and high gross margins means it has the potential to still outperform but it’s not all likely to be plain sailing.

Whether it’s global semiconductor shortages that affect production, trade disputes between the U.S. and China or increased regulatory oversight, speed bumps may lie ahead.

Is ARM Stock a Buy?

Analysts are largely of the view that ARM is a buy and have a consensus price target of $135 per share on the stock.

With that said, the range of estimates is very broad, stretching from $100 to $200 per share, suggesting lack of real conviction or certainty among analysts in where fair value truly lies.

On a discounted cash flow basis, it’s a struggle to arrive at a fair value target that exceeds $100 per share, and that implies material downside risk at this time to new buyers.

Arm Holdings has clearly created an outstanding business model whereby gross margins are high, revenues are rising, key technology giants are dependent on it, and net income is set to soar in the coming years but it seems that price has already run a little ahead of itself.

With earnings before interest and taxes last quarter coming in at $182 million, it’s hard to justify the $140 billion plus valuation at this time. Nonetheless, a pullback may be an excellent opportunity to buy this stellar stock at a better price and a more attractive valuation. For now, it may be best to simply wait patiently on the sidelines and see whether a pullback finally comes.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.