Bernstein analysts upgraded Arm Holdings (NASDAQ:ARM) to Market-Perform in a note Wednesday, raising its price target for the stock to $100 from $92 per share. The firm cited increased confidence in mobile and cloud growth as key drivers.
Bernstein noted that Arm's share price has declined by approximately 40% in the past four weeks, prompting a reevaluation of its valuation.
The analysts now believe that the adoption of Arm's v9 architecture will support 40% of royalties by the end of FY25, primarily from mobile applications. Additionally, they have more conviction in Arm's market share gains in cloud computing.
"With Arm's share price down ~40% in four weeks and more confidence in mobile royalty growth, we find the need to review our valuation argument," Bernstein stated.
They expect these growth areas to contribute to an adjusted diluted EPS of 2.2 in FY26. Maintaining their FY26 target P/E at 45x, they have set a new target price of USD 100.
Arm has established a dominant market share across various applications, with its architecture supporting 99% of mobile application processors, contributing nearly half of its royalty revenue.
Bernstein explains that Arm charges an upfront licensing fee and a per-chip royalty fee, with royalties currently accounting for 50-60% of revenues and expected to increase towards 80%.
Despite ongoing challenges in networking and industrial IoT, Bernstein says mobile and consumer markets are experiencing a cyclical demand increase, bolstered by the accelerated adoption of Arm's v9 architecture, which can command up to twice the royalty rate of v8.
When assessing the investment implications, Bernstein states: "With the recent derating, we now find a more balanced risk/reward and upgrade to Market-Perform."
They also acknowledged potential risks from negative AI sentiment and long-term threats from RISC-V substitution but emphasized the materializing growth in mobile and cloud sectors as supporting Arm's strong valuation.