Chip design firm Arm Holdings (NASDAQ:ARM) had one of the biggest IPOs of 2023. With shares hitting an all-time high in December, questions linger as to where the innovative semiconductor architecture play could be headed next and whether it can flex its muscles this year. The stakes (and valuation) definitely seem higher for 2024. However, I remain bullish on ARM stock, even though I acknowledge that the odds tend to be less favorable, as IPOs don’t really have good track records right out of the gate.
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Looking farther out, there’s a lot to appreciate about Arm Holdings’ growth narrative. As a firm that licenses out its architecture to other firms, the company stands to be capital-light compared to most other plays in the semiconductor scene, specifically those in the business of semiconductor fabrication.
ARM Stock Stands to Gain from the DIY Tailwind
There’s a growing list of big-name technology titans that are taking the route of do-it-yourself (DIY) when it comes to specific hardware (think CPUs). In-housing the development of such technology isn’t just an endeavor that can pad margins; it’s one that could help improve the overall user experience as custom software melds better with custom hardware.
Over the coming years, I don’t think the trend, which Apple (NASDAQ:AAPL) seems to have started with Apple Silicon many years ago, is about to come to a close. Apple exposed many benefits of getting more hands-on with silicon and the value of using Arm’s impressive architecture. As more firms look to Arm as a means to increase the customizability of their silicon, I believe the DIY tailwind is as strong as ever.
Arm may not have a monopoly over semiconductor architecture, as another player could come along and outmuscle Arm, winning the business of its clients in the distant future. However, for now, I believe Arm has a nice moat — one that could widen with time as the British firm continues to innovate.
ARM Stock Winning Over the Praise of Big-Name Analysts
Arm Holdings stock has been winning over a handful of fans within the analyst community of late. Late last year, Wells Fargo (NYSE:WFC) stepped forward, initiating ARM stock as a Buy. At writing, Wells Fargo analyst Aaron Rakers boasts a respectable $85.00 price target on the stock, entailing a solid 21.4% worth of gains from current levels. More recently, Rosenblatt Securities reiterated its Buy rating, with a Street-high price target of $110.00, entailing over 57% upside from here.
Undoubtedly, not every analyst is a fan of the firm and its questionable valuation. As of Friday’s close, ARM stock goes for more than 25 times price-to-sales (P/S) and 52.9 times forward price-to-earnings (P/E). Both metrics are well above semiconductor industry averages. However, Arm is a different type of semiconductor play than its peers.
The capital-light business of licensing architecture seems like it ought to command a greater premium than the rest of the chip group. Just how much of a premium remains the big question on the minds of analysts and investors.
AI Could Be a Huge Deal for Arm Holdings
With the artificial intelligence (AI) revolution heating up by the day, Arm Holdings needs to ensure it stays on the right side of the boom. Arm CEO Rene Haas believes AI will be a massive deal for his firm.
“I think it [AI] will find its way into everything that we do, and every aspect of how we work, live, play,” said Rene. He’s right, and he expects the AI wave of change could hit within the next 10 or even five years.
Though it’s impossible to know with certainty what the future of AI entails for Arm and the rest of the semiconductor scene, I do find it encouraging that Rene has the technology in his crosshairs. There is a lot at stake, but if there’s a firm that can grow into an absolute powerhouse in the AI-driven chip scene, it’s Arm. It has a great management team and all the signs of a long-term winner. Now, all it needs to do is keep executing.
Is ARM Stock a Buy, According to Analysts?
With Wall Street currently quite divided (12 out of 20 ratings are Buys), the bulls view the long-term growth as worth the high price of admission, while the rest view Arm as more of a wait-and-see story. Overall, the stock comes in as a Moderate Buy, according to analysts. The average ARM stock price target is $66.88, implying downside potential of 3.8%.
The Takeaway
ARM stock isn’t everybody’s cup of tea, given its high valuation. However, it stands out as a top candidate in the semiconductor scene that could grow to become the next big thing as the AI revolution advances.
