By UBS initiated coverage of Arm Holdings PLC (NASDAQ: ARM) today with a Buy rating and a $160 price target, implying an 18% upside.
UBS highlighted the growing demand for Arm’s intellectual property in AI, cloud computing, and data centers as key drivers of future growth.
Analyst at the firm believe Arm’s power-optimized CPU architectures, particularly popular among cloud providers, position the company to capture an expanding share of these markets.
Despite already commanding significant market penetration in smartphones, Arm’s growth is expected to outpace the broader market due to increasing royalty rates and higher processor costs in modern devices.
Other analysts have also shared optimistic views.
Wells Fargo initiated an Overweight rating with a $155 price target, citing Arm’s transition to ARMv9 architectures and Compute Subsystems (CSS) as revenue catalysts.
JP Morgan recently increased its target to $160, pointing to Arm’s strong Compute Subsystems progress, which has started lifting blended royalty rates.
While Evercore ISI raised its target to $176, concerns over Arm’s lawsuit with Qualcomm linger, with potential risks around licensing disruptions and customer concentration.
Q2 Earnings beat estimates but licensing revenue remains a concern
For fiscal Q2 2025, Arm reported adjusted EPS of $0.30, beating analyst estimates by $0.04, on revenue of $844 million, which exceeded expectations by $34.23 million.
Royalty revenue rose 23% year-over-year to $514 million, supported by wider adoption of Armv9 technology.
However, licensing and other revenue declined 15% year-over-year to $330 million, reflecting challenges in new license agreements.
The company forecasted Q3 revenue between $920 million and $970 million, slightly below consensus estimates at the midpoint, causing some concern among investors.
The earnings report showcased Arm’s dominance in key markets but also highlighted its reliance on smartphones for nearly half of its revenue.
Notably, Arm’s royalty mix is improving, with ARMv9 products comprising 25% of royalties.
However, adoption remains slow, with legacy ARMv7 architectures still accounting for over 25% of chip sales.
High valuation metrics
At a forward P/E ratio of 82.09, Arm’s valuation is significantly above the semiconductor sector median of 24.25, reflecting high market expectations for growth.
Similarly, the company’s price-to-sales ratio of 34.28 is more than 10 times the sector median of 3.0.
While analysts project robust EPS growth of over 30% annually for the next five years, the valuation remains stretched compared to peers like Nvidia and AMD, whose forward P/E ratios hover around 40.
Legal risks
The recent Qualcomm lawsuit represents a significant risk for Arm.
Qualcomm contributes $39 billion in revenue from Arm-based designs annually, accounting for 11% of Arm’s revenue.
If Qualcomm transitions to alternative architectures like RISC-V, Arm’s revenue could face long-term challenges.
This uncertainty, coupled with intense competition in the chip design space, limits visibility into future earnings potential.
On the opportunity side, Arm’s advancements in AI edge computing, automotive, and IoT provide avenues for growth.
The ARMv9 architecture’s ability to drive higher royalty rates and its growing role in data center compute workloads are promising.
A mixed growth narrative
Arm’s growth story is bolstered by secular trends in AI and data centers but constrained by competition and legal uncertainties.
The company’s ability to sustain high royalty rates and expand into new markets will be critical in justifying its premium valuation.
With analysts divided on its prospects, Arm’s near-term stock performance hinges on resolving the Qualcomm dispute and achieving broader ARMv9 adoption.
As the broader market evaluates Arm’s valuation against its growth potential, let’s turn our attention to its technical setup.
The charts will provide a clearer picture of the stock’s trajectory and whether it can sustain its upward momentum.
Confined within symmetrical triangle pattern
After making its all-time high at $188.75 on 9th July Arm’s stock crashed to a low of $96.66 within a month this year.
Although it has recovered significantly since then currently it is within a symmetrical triangle pattern which can be seen on the charts.
Source: TradingView
Unless it strongly breaks out or breaks down from this pattern, neither bulls nor bears would be in control.
Hence, apart from investors who want to take a very long-term position, short-term traders should refrain from either going long or short at current prices.
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