Saturday, 9 November 2024
by BD Banks
SoftBank Chief Executive Masayoshi Son wants Arm Holdings (ARM) to challenge Nvidia’s lead in the AI chip market.
Son intends to invest billions to develop a network of AI data centers powered by Arm, the Financial Times reported on Oct. 30.
His goal is to transform Arm from an intellectual-property-licensing business into a producer of data-center chips essential for both training and building artificial-intelligence models.
In July SoftBank purchased the UK AI-chip maker Graphcore, which was also driven by expertise in bringing a chip into production, sources told The Fianncial Times.
Currently, Arm does not produce its own processors. It provides the blueprints that chipmakers use to build their processors and then receives licensing payments and royalties from companies like Apple, Samsung and Nvidia. (NVDA)
Related: What’s next for Arm’s stock price after Apple’s partnership?
License revenue is earned by granting the right to use its intellectual property, while royalty revenue is an ongoing fee based on the usage or sales of that IP.
“As a CFO, it’s one of the better business models I’ve seen. I joke sometimes that those older products are like the Beatles catalog: They just keep delivering royalties. Some of those products are three decades old,” Arm Holdings Chief Financial Officer Jason Child said in an interview with CNBC.
Arm Holdings reported fiscal Q2 earnings that surpassed analyst expectations while its sales forecast fell short of hopes.
For the quarter ended Sept. 30, the company reported adjusted earnings per share of 30 cents on revenue of $844 million, while analysts were expecting 26 cents and of $808 million.
The revenue boost was driven largely by a 23% increase in royalty revenue to $514 million. License and other revenue dropped 15% to $330 million.
Related: Analyst revamps Nvidia stock price target after investor meetings
For the current quarter, Arm expects revenue to range $920 million to $970 million, with the midpoint of $945 million in line with analyst expectations of $944.3 million.
However, the midpoint of its full-year revenue forecast, set between $3.8 billion and $4.1 billion, came in below what analysts had projected.
“The long-term growth drivers for our business remain consistent. Every modern digital chip being designed needs a [ceentral processing unit] and the vast majority of these chips are being designed with Arm because of the unequaled software ecosystem,” Arm Chief Executive Rene Haas said during the earnings call.
A number of analysts raised their price targets on Arm after its earnings.
Barclays analyst Tom O’Malley raised his target on Arm to $145 from $125 with an overweight rating, according to thefly.com.
The company affirmed its outlook, indicating that this fiscal year should meet or exceed prior expectations, he said. The analyst highlights the potential for growth, driven by a strong transition to v8/v9 and new data center expansions.
Apple’s latest iPhone 16 series is using Arm’s newest V9 chip design.
JP Morgan analyst Harlan Sur raised his price target on Arm to $160 from $140 while keeping an overweight rating.
The investment firm cited Arm’s strong financial results and increased its estimates to account for a stronger adoption of higher dollar value Compute Subsystems solutions in fiscal 2026.
Arm said during its latest earnings call that it doubled the number of CSS licenses in the past year.
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Susquehanna raised Arm’s price target to $118 from $115 and maintained a neutral rating.
The investment firm indicated that Arm’s earnings report and guidance suggest its fiscal 2025 fourth-quarter earnings per share might come in around 5% below what analysts currently expect. This trend is likely to persist, which could result in another 5% below-expectation impact on EPS projections for FY26, it said.
At last check Arm Holdings shares were trading off 3.6% at $145.26. The stock has more than doubled year-to-date.
Related: Veteran fund manager sees world of pain coming for stocks