An enviable part of Arm Holdings PLC’s business model shone in the latest quarter, and analysts are feeling increasingly upbeat about the company’s future — so much so that the stock was shooting some 50% higher in Thursday morning action.
“The royalty revenue line is the focus of investors — for good reason,” Guggenheim analyst John DiFucci wrote in a note to clients late Wednesday. The business, which “is the primary driver of profit,” grew revenue 11% in the latest quarter to $470 million, beating expectations.
See also: Arm stock soars as chip maker sees ‘signs of recovery’ in its market, raises guidance for the year
“Royalties are the wonderful part of this financial model with margins that are unheard of in other legal endeavors,” DiFucci continued. “Royalties are what will likely drive future free cash flow and the ultimate valuation of the stock.”
But the other part of Arm’s
ARM,
business — licensing — deserves attention too, according to DiFucci. He noted that “today’s license will likely drive tomorrow’s royalties,” and license revenue was up 18% against difficult comparisons. The business is poised “to grow materially again” in the current quarter.
Plus, he sees Arm as “legitimately in the thick of the most talked about topic in technology,” which is artificial intelligence, at a time when other companies say they’re AI winners but haven’t been able to prove that out yet through their financials.
DiFucci rates the stock a buy, and he upped his target price to $93 from $74.
TD Cowen analyst Matthew Ramsay highlighted the company’s progress with its latest-generation ARMv9 architecture, which is becoming a greater part of royalty revenue.
“We were well aware v9 would generate higher royalties, but a doubling of royalties for similar-tier chips was higher than anticipated and means the company achieving or surpassing financial estimates discussed at the IPO [is] much more achievable,” he wrote.
Meanwhile, Ramsay flagged that “all-you-can-eat subscription licenses from key customers continue to ramp in the mix, which should add visibility to licensing revenue over time.”
He has an outperform rating on the stock and boosted his price target to $95 from $80 overnight.
Rosenblatt’s Hans Mosesmann called out the twin engines of AI and the company’s v9 architecture.
“Calendar-year visibility is strong on further v9 mix shift (now only 15% of royalties) and broader non-mobile share gains,” he wrote. “Arm is a primary beneficiary in our view of a secular AI trend that moves inference workloads to the edge from current cloud-centric concentration.”
He upped his price target to $140 from $110, while sticking with a buy rating.
