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Arm Holdings shares (NASDAQ:ARM) have jumped more than 130% So far this year, the spending boom in artificial intelligence continues. But now that ai is just starting to take its first steps, the British chip design firm is set to reap big benefits, according to Morgan. said Stanley.
The Wall Street firm said Arm, which is partially owned by Softbank (OTCPK:SFTBY), has multiple ways to benefit as ai moves to the edge or consumer devices: custom silicon, new designs and extensions.
As such, it expects its total addressable market to reach $14 billion by 2027, including $4.44 billion for smartphones (with expected royalties of $1.87 billion), $1.45 billion for automotive (with expected royalties of $330 million), and the $7.92 billion ai-powered PC market (with expected royalties of $380 million). “We would like to note that we are more cautious about the ai-powered PC opportunity given the historical precedent of competition in the PC space,” the company’s analysts wrote in a note to investors. “This is reflected in our expectations for lower royalty capture relative to the size of the potential ai-powered PC addressable market.”
Morgan Stanley upgraded its rating on Arm from Equal-Weight to Overweight. It also raised its price target to $190 from $107, based on expectations that it could earn $3.88 per share in 2027, up from $1.57 per share this year.
ai Opportunities
Arm is widely known in the tech world, given its client list, which reads like a “who's who” of the industry: it counts Apple (AAPL), Nvidia (NVDA), AMD (AMD), Qualcomm (QCOM), and many others as clients.
Arm generates the vast majority of its revenue by licensing its intellectual property to the aforementioned companies and many others. That's why investors were concerned in May when the company provided below-expected guidance for the rest of the year. However, Morgan Stanley believes the company “underestimated” its guidance for licensing, which should set it up for better-than-expected results.
Additionally, several media reports have said that Apple (AAPL) is likely to increase its iPhone shipments this year, which should also have a positive impact on Arm, Morgan Stanley said.
Finally, implementations of Arm's computing subsystems (due out in 2025 and beyond) are being overlooked, Morgan Stanley said.
“In total, we believe these edge ai development opportunities have explained some of the share price action to date, but our assessment of the true (useful addressable market) of each, coupled with the likelihood of Arm capturing more functionality on the CPU, we believe there is further upside to the Arm story,” the analysts wrote.
Analysts are largely bullish on Arm (ARM). It has a HOLD Seeking Alpha authors rate it as BUYIn contrast, Seeking Alpha's quantitative system, which consistently outperforms the market, has no rating on ARM.
