On Wednesday, Bernstein highlighted a slower than expected progression of the current cyclical downturn in the semiconductor industry, suggesting potential investment opportunities in specific European chip stocks. Bernstein's top picks for the start of the new year are BE Semiconductor Industries (AS:BESI) and Infineon (OTC:IFNNY) Technologies (IFX), with maintained Outperform ratings for ASML Holding (AS:ASML) and STMicroelectronics (STMPA).
The firm noted that strong demand from China has driven wafer fabrication equipment (WFE) to grow an estimated 10% in 2024. However, a flat performance is expected for 2025, with growth resuming in 2026 at about 8%.
Despite additional China export controls announced in November, ASML and ASM International (AS:ASMI) have confirmed that these restrictions align with their expectations and should not impact their 2024/25 revenues.
Bernstein remains optimistic about ASML's growth opportunities and margin expansion through the end of the decade. ASML has reduced its China revenue risk, expecting 20% of sales in 2025, a decrease from nearly 50% in 2024. The firm believes ASML's valuation is attractive due to the long-term growth potential supported by its EUV technology and increased installed base services.
For ASM International, Bernstein sees the adoption of Gate-All-Around (GAA) driving atomic layer deposition (ALD) as planned for 2025. The firm continues to look for potential upside to the EUR 4.5 billion guidance for 2027 or opportunities for margin expansion to drive further value. Although BESI faces uncertainty regarding the timing of cyclical recovery and hybrid bonding adoption, Bernstein expects an inflection in these areas by 2025 and 2026.
The cyclical challenges are anticipated to persist as the primary issue across most end markets, including automotive and industrial, as the industry enters 2025. Nevertheless, Bernstein identifies secular growth drivers such as e-mobility, advanced driver-assistance systems (ADAS), and AI server power, which are expected to sustain growth beyond the current cycle.
This aligns with ARM's strong fundamentals, including a robust gross profit margin of 96% and healthy return on equity of 12%, as reported by InvestingPro. The company's solid financial position is further evidenced by its current ratio of 4.52, indicating strong liquidity to support future growth initiatives.
Bernstein also notes that IFX and STMPA are positioned to benefit from China's market growth in the near term. IFX is favored in the analog sector, with a unique silicon carbide (SiC) strategy and a significant role in AI server power. Bernstein expresses concern over the valuation of ARM, which is trading at a P/E ratio of 227.5x, significantly higher than industry peers.
According to InvestingPro data, ARM has demonstrated strong performance with a 90% YTD return and impressive revenue growth of 24.6% in the last twelve months. While ARM maintains a solid financial health score and operates with minimal debt, current market prices suggest the stock is trading above its Fair Value.
Despite improved royalty rates, Bernstein remains cautious about the sustainability of its licensing-focused guidance for FY25 due to ongoing cyclical challenges. For investors seeking deeper insights, InvestingPro offers comprehensive analysis with 13 additional ProTips and a detailed Pro Research Report, helping investors make more informed decisions about ARM's valuation and growth prospects.
In other recent news, Arm Holdings (NASDAQ:ARM) has been the subject of various analyst evaluations and significant financial developments. Mizuho (NYSE:MFG) Securities maintains an Outperform rating on Arm Holdings, with a price target of $160, adjusting its future earnings estimates for the company.
The firm anticipates an increase in the top line by 22% for the fiscal year 2025 and 25% for 2026. Benchmark, however, maintains a Hold rating on Arm Holdings, citing valuation concerns despite the company's strong industry standing.
UBS initiated coverage of Arm Holdings with a Buy rating and a price target of $160, suggesting a 20% upside potential, while Wells Fargo (NYSE:WFC) also started coverage on Arm Holdings with an Overweight rating and a price target of $155. Loop Capital maintained a positive outlook on Arm Holdings, raising the price target to $180 while keeping a Buy rating.
Arm Holdings reported strong Q2 FY2025 results, with total revenue reaching $844 million, driven by a 23% year-over-year increase in royalty revenue. The company anticipates a 40-45% increase in licensing revenue for the fiscal year, and a continued 23% year-over-year growth in royalties across various sectors. These recent developments highlight Arm Holdings' strategic positioning and potential for increased market share.
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