On Thursday, Bernstein raised the price target for Arm Holdings (NASDAQ:ARM) to $72 from $46, while maintaining an Underperform rating on the stock. The adjustment comes as the firm anticipates the end of fiscal year 2024, citing several factors influencing their outlook.
AI-related demand has been a significant driver for licensing growth at Arm Holdings. However, the company remains cautious about its forecast for fiscal year 2025 and beyond. Although Arm's Flexible Access (AFA) and Automotive Technology Access (ATA) programs have been successful, there has been a noted slowdown in the growth of customer numbers. Bernstein is now focusing on Annual Contract Value (ACV) as a critical metric for future growth.
China, which accounts for an elevated 25% of Arm's revenues compared to 20% in the previous quarter, continues to be a concern. The expectation is for this percentage to decrease in terms of revenue share. The results of the next quarter are expected to provide more insight into market share and royalty rate progress as Arm approaches the end of its first year as a publicly-traded company.
Based on recent results and guidance, Bernstein has increased their top-line projections for fiscal year 2024 and beyond. This revision is driven by higher licensing revenues and an anticipated increase in mobile application processor royalties. The penetration of Arm's v9 architecture is expected to accelerate, with royalties forecasted to reach 5% by fiscal year 2026 and 7% by the end of the decade, an increase from the previous estimate of 5%.
Research and development (R&D) and selling, general, and administrative (SG&A) costs are expected to revert to levels seen before the acquisition by Softbank (OTC:SFTBY), which is slightly below consensus. The adjusted EBIT margin is projected to be close to 50% by fiscal year 2027. Bernstein has shifted their valuation methodology to a Price/Earnings (P/E) basis, aligning with their approach for other companies they cover. They have set a fiscal year 2026 P/E ratio of 40x for Arm Holdings, which is at the higher end compared to peers such as Synopsis, Cadence, and Nvidia (NASDAQ:NVDA). This valuation underpins the increased price target of $72. Despite the raised target, the firm reiterates its Underperform rating on the stock.
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