Softbank-Backed Arm Holdings 155% Post-IPO Surge Bolstered by AI Growth and Smartphone Integration - ARM

British chip designer Arm Holdings Plc (NASDAQ:ARM) stock has surged over 155% since its September 2023 initial public offering, making way to the Nasdaq 100 index. Arm chip designs mainly cater to smartphones, including Apple Inc’s (NASDAQ:AAPL) iPhone.

CEO Rene Haas proclaimed the potential of AI to drive growth in the smartphone and Arm sectors.

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Arm Holdings stock gained 26% year-to-date versus the S&P Semiconductors Select Industry Index’s 4.3% decline.

Haas aims for Arm to capture over 50% of the Windows PC market within five years and envisions 100 billion AI-ready Arm devices worldwide by 2025. In 2024, Microsoft Corp (NASDAQ:MSFT) launched Windows PCs with AI capabilities powered by Arm chips to intensify the rivalry with Apple’s Mac lineup.

Amazon.Com Inc (NASDAQ:AMZN) and Alphabet Inc’s (NASDAQ:GOOG) (NASDAQ:GOOGL) Google remain invested in building out new data centers bypassing Intel Corp’s (NASDAQ:INTC) x86 and are instead using a combination of Arm architecture and their in-house chip designs. Arm-based chips are increasingly taking center stage in Nvidia Corp’s (NASDAQ:NVDA) current-generation AI systems.

Arm sustained gross margins of 95%-96% by designing and licensing semiconductor intellectual property instead of manufacturing physical chips.

This enables it to earn upfront fees and ongoing royalties for each chip sold using its designs. Arm’s research and development margin increased to 61% in fiscal 2024 from 42% a year ago.

Arm’s positive catalysts: Last week, CEO Rene Haas declared Arm’s expanding role in AI infrastructure through its involvement in OpenAI’s $100 billion Stargate AI infrastructure project. It also plans to boost prices by up to 300% and has discussed manufacturing its chips.

Reportedly, Arm has been strategizing since 2019 to raise its annual smartphone revenue by ~$1 billion over a decade to boost royalty rates for its latest Armv9 computing architecture.

Haas has explored producing complete chips or chipsets, posing as a rival to its current customers, Apple and Qualcomm. However, the British chip designer is involved in a licensing disagreement between Arm and Qualcomm Inc (NASDAQ:QCOM), reportedly threatening to disrupt the shipment of new AI-powered laptops.

Wall Street analysts, including Raymond James‘ Srini Pajjuri, expressed optimism over Armv9 CPU architecture and the progress of compute subsystems (CSS), which essentially doubles the royalty rate, fueling continued strong double-digit growth. They expect the emergence of AI agents and efficient AI models (such as DeepSeek) to be significant positives for Arm.

Needham’s Charles Shi noted the company is overdelivering the fiscal 2025 targets set during the IPO and transition from licensing-driven growth to royalty-driven growth.

Analysts also flagged exposure to China (historically accounted for 20% of Arm’s overall sales) and ongoing smartphone, networking, and auto-cyclical headwinds.

Meanwhile, Arm China tapped Chen Feng as sole CEO after co-CEOs Liu Renchen and Eric Chen stepped down. The co-CEOs have served as interim leaders of Arm China since the company terminated Allen Wu in 2022 for alleged conflicts of interest.

Japanese conglomerate SoftBank Group Corp (OTC:SFTBF) (OTC:SFTBY) snapped Arm in 2016 for $32 billion. SoftBank retained 90% of its ownership in Arm.

Price Actions: ARM stock closed at $155.41 on Wednesday.

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