On Thursday, Bernstein SocGen Group updated its outlook on Arm Holdings (NASDAQ: NASDAQ:ARM), increasing the price target to $92 from $72, while maintaining an Underperform rating on the stock. The adjustment follows Arm's report of a second consecutive quarter of record revenue, which exceeded expectations at $928 million.
The revenue surge was primarily attributed to a significant increase in non-royalty income, particularly licensing, which saw a 17% rise quarter over quarter and a 60% jump year over year. Arm Holdings secured four new ATA agreements, bolstering this growth. Additionally, royalty rates have climbed, with v9 royalties now accounting for 20% of the fourth-quarter royalties, up from 15% in the previous quarter. This change led to a 9% quarterly and 37% annual increase in royalties.
Despite the positive revenue trends, the company's guidance for fiscal year 2025 did not surpass investor expectations. The forecast for Q1 revenue is set at $900 million, with adjusted diluted EPS at $0.34. The full-year revenue projection is $3.95 billion, slightly below consensus estimates but up from Bernstein's previous forecast. Licensing revenues are anticipated to rise in the second half of the year.
Arm's expansion into artificial intelligence (AI) chip design was met with skepticism due to the company's focus on its core business and previous challenges under Softbank (OTC:SFTBY)'s ownership. Nonetheless, Arm continues to see positive signs in data center and laptop markets and is advancing its CSS for automotive applications.
The revised price target and financial projections are influenced by higher licensing revenues and market share gains in the data center sector. Bernstein SocGen Group anticipates adjusted EBIT margins for Arm Holdings to reach 49% by fiscal year 2026 and 50% by 2027.
The firm has also increased its FY26 P/E multiple from 40x to 45x, in line with re-rating observed in peer companies Cadence and Synopsis. Despite the upward revision, the new target price still sits below the current market price, leading to the reiteration of the Underperform rating.
InvestingPro Insights
As Arm Holdings (NASDAQ: ARM) navigates a landscape of increased revenue and strategic growth in AI chip design and data center market share, real-time data from InvestingPro offers additional insights. With a market capitalization of $118.25 billion, Arm's growth trajectory is reflected in a substantial revenue increase of 20.68% over the last twelve months as of Q4 2023. This is further emphasized by the company's gross profit margin standing at an impressive 95.24% for the same period. Investors are also taking note of the stock's remarkable performance with a 78.75% return over the last year.
These metrics are particularly relevant given the context of the article's discussion of Arm's financial performance and market potential. The InvestingPro Tips highlight that analysts have revised their earnings upwards for the upcoming period, which aligns with the positive revenue trends mentioned in the article. Additionally, Arm's significant return over the last week and high return over the last year complement the article's narrative of a company on an upward trajectory, despite the skepticism around its expansion into AI chip design.
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