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ARM Holdings PLC's Business Model Shines in Latest Quarter

4.9

Charles M. Hall

February 08, 2024

Analysts Optimistic about Future Prospects

Arm Holdings PLC's business model continues to impress as it reported strong performance in the latest quarter, causing analysts to feel increasingly positive about the company's future. This optimism has translated into a significant surge in the stock price, which has risen by around 50% in Thursday morning trading.

According to Guggenheim analyst John DiFucci, the focus of investors is on Arm's royalty revenue line, and for good reason. This segment of the business is the main driver of profit and recorded an 11% increase in revenue to $470 million, surpassing expectations.

DiFucci emphasized the exceptional nature of Arm's royalty model, stating that it provides margins that are unprecedented in other industries. He believes that royalties will continue to be instrumental in driving future free cash flow and ultimately determining the stock's valuation.

However, DiFucci also highlighted the importance of Arm's licensing business. He pointed out that today's licenses will likely lead to future royalties, and in the latest quarter, license revenue increased by 18%, despite challenging comparisons. DiFucci expects this segment to experience significant growth in the current quarter.

Furthermore, DiFucci recognizes Arm as a player in the booming field of artificial intelligence (AI). He believes that Arm is genuinely at the forefront of this technology, unlike other companies that claim to be AI winners but lack evidence of their success in financial reports.

Increased Royalties and Financial Growth

TD Cowen analyst, Matthew Ramsay, has highlighted the significant progress made by ARM with its latest-generation ARMv9 architecture. This architecture is now contributing to a larger portion of royalty revenue. Ramsay noted that the doubling of royalties for similar-tier chips exceeded expectations, making it more likely for the company to achieve or surpass its financial estimates discussed during the IPO.

Strong Subscription License Growth

Ramsay also acknowledged the increased adoption of "all-you-can-eat" subscription licenses from key customers. This growth is expected to improve visibility in licensing revenue over time. As a result, Ramsay has raised his price target to $95 from $80 and maintains an outperform rating on the stock.

AI and ARMv9 Architecture as Strong Drivers

Hans Mosesmann from Rosenblatt has emphasized the significance of AI and ARM's v9 architecture as major catalysts for the company. With a strong shift towards the v9 architecture (which now accounts for only 15% of royalties), combined with non-mobile market share gains, Mosesmann sees a positive outlook. Furthermore, he views ARM as a primary beneficiary of the ongoing trend of inference workloads moving to the edge, driven by the secular AI trend. Consequently, Mosesmann has increased his price target to $140 from $110 and maintains a buy rating.

With these positive developments and increased price targets by reputable analysts, ARM Holdings appears poised for continued growth and success moving forward.