ARM Stock Forecast: Analysts Warn of Volatility and Headwinds

Arm Holdings (ARM:NSD) recently had a stock market debut. It surged 25% on its first trading day due to Softbank’s backing. However, this initial enthusiasm quickly faded. The current trading price stands at $52.51, significantly lower than the September 14 closing price of $63.59. The investment community is now expressing concerns regarding the ARM stock forecast. Concerns include its high valuation and its exposure to the intricate Chinese market.

ARM’s Complex Market Dynamics:

Arm Holdings, known for licensing its chip architecture rather than manufacturing chips itself, boasts that its central processing units (CPUs) power over 99% of the world’s smartphones, among other devices.

Nevertheless, Arm now grapples with competition from the ascendant open-source RISC-V chip architecture, which has begun to pique the interest of some of Arm’s own clients. Additionally, the company contends with rivals like Advanced Micro Devices (AMD:NSD) and Intel (INTC:NSD), whose advanced x86 architecture reigns supreme in the laptop and data center segments.

Challenges on Multiple Fronts:

Challenges for ARM also include its exposure to China, a market ensnared in escalating U.S.-China tensions, and sluggish top-line growth driven by a lackluster smartphone market. Moreover, revenue concentration is a notable concern, as the top five customers, including Arm China, accounted for approximately 57% of total revenue in the fiscal year ending March 31, 2023.

Analyst’s Assessment of ARM Holdings:

Susquehanna analyst Mehdi Hosseini entered the fray on September 22, initiating coverage of Arm stock with a ‘Neutral’ rating and a target price of $48. Hosseini suggests that the stock’s risk/reward profile is fairly balanced. He underscores the mobile market’s weakness, which happens to be Arm’s largest end market. Furthermore, Arm’s second-largest market, the microcontroller sector, is nearing market share saturation, potentially jeopardizing further growth if the company attempts to raise royalty rates.

On September 25, Bernstein analyst Sara Russo echoed the note of caution by reiterating a ‘Sell’ rating on ARM stock, setting a price target of $46. Russo appreciates the company’s fundamentals and its dominance in the mobile sector. However, she underscores that ARM is not immune to the sluggish smartphone market and anticipates that mobile royalty rates won’t see an immediate uptick.

Russo’s Mobile Royalty Projections:

Russo also highlights that her projections for mobile royalty rates in FY27, and consequently revenue growth expectations, remain below the management’s optimistic estimates.

ARM Stock Forecast:

The consensus among experts places the average target price of USD 48.00 over the next 12 months. Stock Target Advisor’s analysts are ‘Very Bullish.’ This assessment is supported by three positive signals and no negative signals.

ARM’s Current Performance:

At the last closing, shares traded at USD 53.46, registering a modest 0.89% increase over the past week, with no significant fluctuations over the last month or year.

Conclusion

Arm Holdings envisions a robust 6.8% annual market growth to $246.6 billion by 2025, driven by AI and cloud computing. Yet, Wall Street advises caution, deeming current stock valuation reflective of these prospects, limiting potential upside. ARM investors should tread carefully.

Maryam Nasir