Arm Holdings Growth Prospects: Bull Vs. Bear Case

Needham analyst Charles Shi maintained a Hold rating on Arm Holdings Plc ARM.

Following over a week of calls with investors on Shi's ARM initiation, the analyst flagged the bull vs. bear cases. 

The bull/bear debate hinges on whether investors can underwrite Arm's outer-year growth targets and senses that the overall sentiment leans negative.

Investors who lean bullish on the stock believe Arm will be able to reach $4 billion+ revenue (vs. Needham's estimate at ~$3.9 billion and consensus estimate at ~$3.8 billion) and ~$1.70 EPS (vs. Needham's estimate at $1.44 and consensus estimate at $1.32) in FY26. 

Investors looking for ~$1.70 in FY26 EPS are modeling the growth provided by management during the IPO process of 11% in FY24, mid-20%s in FY25, and high-teens in FY26 and expect sell-side analysts from the IPO syndicate to come out with price targets around $70 per share in early October. 

Bullish investors believe outer-year estimates will move up in about two weeks.

Investors who lean bearish on the stock believe Arm's FY26 growth targets are only achievable if everything goes according to plan. 

According to these investors, the goal is to raise mobile royalty rates from 2-3% to ~5% by FY26 by transitioning customers from legacy platforms such as Armv8 or older to Armv9. 

Despite the heavy press coverage of Arm as an AI stock leading up to its IPO, no institutional investors Shi spoke to see Arm as an AI play. 

Investors generally see Arm's role in Nvidia Corp NVDA Grace as too small to be meaningful, and Arm's opportunity in inference and edge AI is too early to call, especially when Arm does not enjoy a dominant position in mobile GPUs or NPUs as they do with mobile CPUs.

Price Actions: ARM shares closed lower by 1.69% at $53.52 on Tuesday.

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