Arm
Holdings
(ARM) went
public
in
September
2023
at
$51
per
share.
The
stock
closed
at
a
post-IPO
high
of
$77.47
on
December
28,
2023,
but
has
since
fallen
to
around
$72.
Here
is
Morningstar’s
take
on
Arm’s
stock
and
the
outlook
for
the
company.
Arm
is
a
good
business.
It
has
a
monopoly
in
smartphones
and
wearables
(99%
market
share
in
the
former,
very
high
in
the
latter),
and
it
has
begun
to
gain
share
in
data
centres
and
automotive,
which
are
very
attractive
markets.
In
easy
terms,
this
is
because
Arm’s
chips
are
less
powerful
than
x86
chips
(architecture
used
by
Intel INTC and
Advanced
Micro
Devices AMD)
but
more
energy-efficient.
We
think
Arm
is
in
a
financially
healthy
position,
with
$1.6
billion
of
cash
on
hand
and
no
debt.
The
firm
does
not
intend
to
pay
any
dividend
on
its
ordinary
shares,
according
to
its
IPO
filing.
We
also
don’t
expect
any
significant
M&A
to
happen,
as
Arm
would
probably
face
antitrust
scrutiny
for
any
mid-
or
large-sized
deal,
given
its
very
high
market
share.
Given
the
lack
of
dividends
and
M&A
opportunities,
we
expect
Arm
will
use
its
internally
generated
cash
flow
to
reinvest
in
the
business
through
R&D,
fund
share
repurchases,
or
simply
bolster
its
balance
sheet.
Arm
is
Overvalued
After
the
Rally
With
its
2-star
rating,
we
believe
Arm’s
stock
is
overvalued
compared
with
our
long-term
fair
value
estimate.
Our
fair
value
estimate
for
Arm
is
$34
per
share,
which
implies
an
enterprise
value
to
EBIT
multiple
of
41
times
and
31
times
for
fiscal
years
2024
and
2025,
respectively.
At
Arm’s
IPO
price
debut
of
$51
per
share,
the
enterprise
value
to
EBIT
multiples
would
be
59
and
41
times
for
2024
and
2025,
respectively.
Economic
Moat
Rating
We
assign
Arm
a
wide
economic
moat
based
on
its
intangible
assets
and
switching
costs.
Arm
is
the
IP
owner
and
developer
of
the
ARM
(“Acorn
RISC
machine”)
architecture,
which
is
used
in
99%
of
the
world’s
smartphone
CPU
cores.
It
also
has
high
market
shares
in
other
battery-powered
devices,
such
as
wearables,
tablets,
and
sensors.
Risk
and
Uncertainty
Stem
from
China
Exposure
We
give
Arm
a
High
Uncertainty
Rating,
with
key
risks
coming
from
China
and
the
slow
but
steady
adoption
of
RISC-V.
More
than
20%
of
Arm’s
business
comes
from
China.
Arm
China
is
the
only
entity
allowed
to
sell
Arm’s
IP
in
the
country,
but
it
is
not
controlled
by
Arm
Holdings.
Rather,
Arm
licenses
IP
to
Arm
China,
which
then
sublicenses
it
to
Chinese
customers
like
Xiaomi
or
Huawei.
Arm’s
revenue
recognition
from
the
country
is
dependent
on
the
information
Arm
China
provides,
and
financial
reporting
controls
have
historically
been
weak.
SoftBank
(Arm
Holdings’
main
shareholder)
still
has
significant
influence
over
Arm
China,
but
if
it
departs,
it
would
leave
an
intricate
web
of
corporate
subsidiaries.
There
could
be
attempts
to
steal
intellectual
property
from
Arm
China,
given
geopolitical
tensions
between
the
United
States
and
China.
2022
saw
a
series
of
corporate
fights
at
Arm
China.
Previous
CEO
Allen
Wu
was
accused
of
unethical
behavior.
It
took
months
for
SoftBank
and
other
anchor
investors
to
get
rid
of
him,
and
he
still
has
a
stake
in
the
company.
Morningstar
Key
Metrics
For
Arm
-
Fair
Value
Estimate:
$34; -
Morningstar
Rating:
2
Stars; -
Morningstar
Economic
Moat
Rating:
Wide; -
Morningstar
Uncertainty
Rating:
High.
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