Arm Holdings (NASDAQ: NASDAQ:ARM) continues to dominate the smartphone and consumer electronics markets, with its technology found in nearly every smartphone and a significant portion of consumer electronics. However, despite generating about $2.7 billion in revenue during fiscal 2023 from licenses and royalties, the company is facing stagnant growth prospects.
The market value of chips containing Arm's technology was nearly $100 billion in 2022. In the smartphone sector, Arm's market share exceeds 99%, a position it has maintained for many years. The company's chips are also widely used in the consumer electronics market.
Despite its dominance, growth in these mature markets is limited. With such a high market share, Arm's revenue can only increase with a rise in device shipments containing its chips or an increase in the revenue it derives from each chip. However, there are no significant gains to be made in terms of market share.
The smartphone market is currently experiencing a downturn, with global shipments anticipated to drop by 4.7% this year to 1.15 billion units, according to International Data Corporation (IDC). This follows an 11.3% decline in 2022, including an 18.3% slump in the fourth quarter of that year.
A similar trend is seen in the smart home devices market, where global shipments dropped 2.6% in 2022, including a sharper 4.3% decline for smart TVs. This downward trend could continue into 2024 as consumers limit discretionary spending.
Over 50% of Arm's royalty revenue in fiscal 2023 came from smartphones and consumer electronics. While there's potential for Arm's processors to become more complex and generate additional royalty revenue, particularly through built-in AI functionality, stagnant unit shipments may hinder significant growth.
Despite more than half of Arm's royalties being essentially locked in, with the smartphone market unlikely to switch architectures and Apple (NASDAQ:AAPL) having an agreement with Arm extending past 2040, the long-term growth story for over half of Arm's royalty business looks weak. This, coupled with a post-IPO valuation trading at over 20 times sales and 100 times earnings, makes the stock difficult to justify, especially given the total revenue decline in fiscal 2023 due to slumping demand for smartphones and other devices.
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