Arm Holdings slumps even as Wall Street is encouraged by AI progress, potential

Arm Holdings (NASDAQ:ARM) was in focus on Thursday after the British semiconductor design company reported fiscal second-quarter results and guidance for the coming quarter that left Wall Street analysts encouraged by what they heard and expect as the artificial intelligence spending boom continues.

Shares fell 6% in premarket trading, while chipmakers that use ARM’s intellectual property, such as Nvidia (NVDA), AMD (AMD) and Broadcom (AVGO), were fractionally higher.

JP Morgan analyst Harlan Sur raised his price target to $160 from $140 and reiterated his Overweight rating as he was “encouraged” by the progress Arm is making.

“We are encouraged by the team’s strong progress in [Compute Subsystems] which we believe will lift the overall blended royalty rate for the company,” Sur wrote in a note to clients. “For ARMv9 related products, the absolute dollar revenue capture continues to trend higher but was flattish Q/Q as % of royalty mix (25% in Sep-Qtr) given a strong ARMv8 shipment profile (we believe due to strong China mainstream Android smartphone shipments). We continue to see ARMv9 reaching 60-70% of the royalty revenue mix over the next [two to three] years.”

In addition, Sur said Arm is “well positioned” to see 20% or more revenue growth and 40% or more earnings per share growth over the next several years, buoyed by higher intellectual property content, market share gains and growth in areas such as AI, automotive and data center compute.

Evercore ISI analyst Mark Lipacis also upped his price target (to $176 from $173) as he too was encouraged by the progress of Arm’s Compute Subsystems business.

“We model CSS royalty revs start ramping in F4Q, which layer on top of V9 as a growth driver,” Lipacis wrote in a note to clients.

“We remain bullish on ARM given its unique position benefiting from 3 secular drivers,” Lipaciss added, referencing Arm’s position in bringing AI to edge devices, data centers and internet of things. “We believe AI could drive more Arm processing power into IoT devices, which could drive [average selling prices]/royalty rates higher.”

Morgan Stanley analyst Lee Simpson was also impressed with what he heard, though concerns over a “marginally weak” guidance for the third quarter and unchanged guidance for fiscal 2025 may account for the weakness in the stock.

“Licensing was strong, and we note new [Arm Total Access] and [Arm Flexible Access] deals,” Simpson wrote. “The shareholder letter also talks on AI design momentum, as well as broadening of use of Arm in edge AI – especially in automotive. Meantime, the v9 architecture has held at c.25% of royalties (c.25% last Q), slowing the cadence of +5pps per Q seen of late and a lack of commentary on strong momentum in smartphones (leaving aside a new MediaTek chip) was notable. All the same, despite the weaker than hoped Q3 guide, we expect Arm to at least meet expectations through this year, given a broad range of drivers.”