Arm Holdings (NASDAQ:ARM) just released a slew of positive data. However, you don’t have to pounce on this opportunity yet, as a pullback may be imminent. I am bullish on ARM stock for the long term, but I encourage investors to resist the frenzy and time their entries carefully.
Arm Holdings, typically just called Arm, is based in Great Britain, and the company specializes in chip-design technology. This technology is found in many of today’s smartphones and personal computers (PCs). These devices are often enhanced with artificial intelligence (AI) functionalities nowadays.
Thus, if the AI hardware market is doing well, then it’s reasonable to conclude that Arm is also doing well. Nonetheless, if the market is pricing in too much optimism for Arm’s future growth, sensible investors should probably just be patient and wait for a more favorable risk-to-reward scenario.
ARM Stock: Get Ready for Price Target Hikes
Even before today’s jaw-dropping share-price move, analysts were moderately optimistic about ARM stock (see below for more details on that). It’s understandable if some analysts like Arm’s growth prospects, especially if they feel that AI will give the PC and smartphone markets a boost in 2024. However, the bullish sentiment seems to be going into overdrive now, and soon, investors should expect many analysts to raise their price targets on Arm.
That’s because ARM stock went vertical today, up more than 60% at one point and finishing 47.9% higher. I’m already starting to see the price-target escalation happening. For example, Guggenheim analyst John DiFucci assigned a Buy rating to Arm shares and lifted his price target from $74 to $93.
Meanwhile, Rosenblatt analyst Hans Mosesmann reiterated his Buy rating on ARM stock and raised his price target on the shares from $110 to $140. It’s early, as Arm’s latest quarterly data release is still fresh, so don’t be surprised if more Wall Street experts escalate their price targets on Arm shares during the next few days.
Arm Gets a Boost from Shift to AI
What drove Arm Holdings’ impressive Fiscal Q3-2024 results and optimistic guidance? The primary driver, reportedly, is artificial intelligence (AI)-led demand for the hardware that Arm designs.
Arm’s executives indicated that a faster-than-expected shift to AI boosted the company’s results. Whether the AI trend was the main driver or not, there’s no denying that Arm’s Q3-2024 results reflected better-than-expected growth.
Specifically, Arm previously guided for revenue of $720 million to $800 million but actually reported $824 million in revenue, up 14% year-over-year. This result also beat Wall Street’s consensus estimate of $762 million.
Turning to the bottom line, Arm posted adjusted earnings of $0.29 per share, up 32% year-over-year. This represents another Street beat since analysts only expected Arm to earn $0.25 per share.
Looking ahead, Arm guided for current-quarter earnings of $0.28 to $0.32 per share, a range that easily exceeds the consensus estimate of $0.21 per share. Moreover, Arm’s management anticipates that the company will generate current-quarter revenue of $850 million to $900 million, a range that’s substantially above Wall Street’s consensus forecast of $780 million.
I suspect that the market is panic-buying ARM stock as an expression of its worry that maybe the AI market is overblown, and they’re hoping that Arm’s results point to the AI market not being overblown. Regardless, it’s understandable if value-conscious and contrarian investors can’t accept the notion that Arm Holdings should be worth 48% more today than it was yesterday.
Is ARM Stock a Buy, According to Analysts?
On TipRanks, ARM comes in as a Moderate Buy based on 12 Buys, five Holds, and one Sell rating assigned by analysts in the past three months. The average Arm Holdings stock price target is $87.13, implying 23.5% downside potential.
If you’re wondering which analyst you should follow if you want to buy and sell ARM stock, the most profitable analyst covering the stock (on a one-year timeframe) is John Vinh of KeyBanc, with an average return of 48.8% per rating and a 100% success rate. Click on the image below to learn more.
Conclusion: Should You Consider ARM Stock?
Since Arm Holdings’ chip designs are so pervasive in the smartphone and PC markets, it makes sense to feel bullish on the company for the long term. Right now, though, the market may be pricing in too much AI-market relief and optimism.
So, what can people do if they want to invest in Arm Holdings? The answer, in my opinion, is to be patient. It’s not unusual for a vertical share-price move to be followed by a retracement.
Consequently, even though I like Arm Holdings’ long-term growth prospects, I won’t consider buying ARM stock until it pulls back below $100 and, preferably, below $85. If this never occurs, I haven’t lost any money, though I might have lost an opportunity. That’s a chance I’m willing to take as a contrarian investor who refuses to chase parabolic price moves.
