Home News Why investors are excited about the chip design arm as shares rise nearly 50%

Why investors are excited about the chip design arm as shares rise nearly 50%

by SuperiorInvest

Key takeaways

  • Arm shares soared 48% on Thursday after the company beat quarterly earnings expectations and provided strong guidance, as demand for AI hardware increases.
  • Arm said it expects next quarter’s royalty revenue to be even stronger than last, as the company’s v9 processor architecture earns about double the royalty rate of the previous v8 product.
  • Analysts said they expect Arm to be a key beneficiary of growing demand for AI devices, particularly premium smartphones.
  • The chip designer’s clients include some of the world’s most valuable AI heavyweights, including Nvidia, Google parent Alphabet, and Microsoft, among others.

Arm (ARM) stock rose nearly 50% on Thursday after the semiconductor designer beat quarterly profit estimates and raised its forecast for the year due to growing demand for artificial intelligence (AI) processing hardware.

Many analysts raised their price targets for Arm stock after its huge earnings, citing better-than-expected royalty income, although with Thursday’s earnings, the stock has already surpassed some of the lofty price targets.

The company’s shares ended Thursday up 48% at $113.89, after rising as high as $126.58 in intraday trading. They have gained 87% since Arm made its debut on the Nasdaq in September of last year.

A key way Arm makes money is by earning royalties on products made by chip companies that license its designs to make products, and its clients include some of the world’s most valuable AI heavyweights, such as Nvidia ( NVDA), Alphabet, parent of Google (GOOGL), Qualcomm (QCOM) and Microsoft (MSFT), among others.

“We’re involved in almost every market, and every market is putting more and more computing into their devices,” Arm CEO Rene Haas said during an interview on CNBC Thursday.

After the better-than-expected fiscal third quarter, Arm said it expects next quarter’s royalty revenue to be even stronger as the company’s v9 processor architecture earns about double the royalty rate of the previous v8 product.

Jefferies analysts said they see Arm as “a key beneficiary of the growing demand for cutting-edge AI devices, especially premium smartphones.”

They noted that “China was the main contributor to the better-than-expected performance in the third quarter of the fiscal year” and that the firm “estimates[s] “Royalties accounted for most of this strength, led by strong sales of premium smartphones like the Huawei Mate 60.” Last week, Apple reported weak iPhone sales in China amid tougher competition from phone makers. based in China.

Jefferies analysts said the firm believes “we are in the early stages of a cycle of AI-powered smartphones, backed by advanced chipsets such as Qualcomm’s Snapdragon 8 Gen 3 and Mediatek’s Dimensity 9300 that are being launched.” based on the V9″ architecture.

“Demand for AI-enabled smartphones is further strengthening” Arm’s position, as AI is “driving greater chip design activity and therefore greater licensing revenue.”

Bank of America analysts acknowledged that “the bears would cite irregularities in licensing agreements, sales in China and stock volatility,” but indicated that the firm believes they “don’t see the bigger picture around the acceleration of more than 30% of annual royalty sales with highly accretive margins.” “

The analysts added that Bank of America believes almost all hyperscalers “have or are working on their in-house ARM-based server CPU or looking at ARM solutions from NVDA (Grace Hopper) or other commercial vendors,” which could help Arm expand your business. market share of less than 5% to 10% to 15%, which will allow it to better compete with Intel (INTC) and Advanced Micro Devices (AMD).

CFRA noted that while royalty income was higher than expected, the firm believes that “data centers remain ARM’s largest growth opportunity.”

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