•
Fair
Value
Estimate:
$57.00
• Morningstar
Rating:
★
•
Morningstar Economic
Moat
Rating:
Wide
• Fair
Value
Uncertainty:
High
Although
shares
have
declined
by
about
20%
since
their
$150
peak
in
February,
Arm
trades
at
a
105%
premium
to
its
fair
value.
What
We
Thought
of
Arm’s
Earnings
Despite
the
company
doing
a
double
beat
on
revenue
and
adjusted
EPS,
shares
went
down
10%
aftermarket
on
the
day
of
the
earnings
report.
This
demonstrates
how
demanding
the
market
will
be
with
Arm.
For
the
next
quarter,
anything
not
at
the
high
part
of
the
guidance
range
or
better
will
be
perceived
as
a
miss.
Management
guided
for
roughly
20%
revenue
growth
in
2026
and
2027,
in
line
with
Morningstar’s
estimates.
This
highlights
how
well
Arm
is
executing,
with
market
share
gains
and
price
increases
through
royalty
rate
raises.
The
cloud
and
automotive
businesses
were
the
bright
spots,
while
the
industrial
market
was
the
weakest
area.
The
stock
is
still
highly
overvalued
in
the
$100s
range,
thanks
to
the
great
expectations
around
it.
Fair
Value
Estimate
for
Arm
With
its
1-star
rating,
we
believe
Arm’s
stock
is
significantly
overvalued
compared
with
our
long-term
fair
value
estimate.
Our
increased
fair
value
estimate
comes
from
higher
licensing
revenue
and
royalty
rates
over
the
longer
term.
We
estimate
royalty
rates
for
v9
could
be
3%-4%,
compared
with
the
1.7%
blended
rate
the
firm
reported
in
its
IPO
filing
for
2022.
Adoption
of
v9
keeps
increasing
mainly
thanks
to
adoption
in
smartphones
and
the
data
centre,
and
management
sees
it
increasing
in
the
following
year.
Our
fair
value
estimate
represents
an
EBIT
multiple
of
42
times
for
fiscal
2024
and
38
times
for
fiscal
2025.
Overall,
we
model
Arm’s
revenue
seeing
a
13%
compound
annual
growth
rate
over
the
next
10
years.
We
expect
royalty
revenue
will
grow
in
the
high-single-digit
or
double-digit
range,
while
licensing
revenue
will
grow
by
the
mid-single-digits.
Arm’s
average
royalty
rate
in
2022
was
1.7%,
and
we
expect
that
to
expand
to
more
than
3%
in
2030
after
the
introduction
of
v9
and
future
architecture
improvements.
After
our
10-year
explicit
period,
we
model
double-digit
returns
on
new
invested
capital
and
mid-single-digit
growth
in
profits
for
another
10
years,
in
line
with
the
modelling
for
a
wide-moat
firm.
Economic
Moat
Rating
We
assign
Arm
a
wide
moat
based
on
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.
The
firm
also
has
a
high
market
share
in
other
battery-powered
devices,
like
wearables,
tablets,
and
sensors.
In
a
chip,
the
instruction
set
architecture,
or
ISA,
is
a
set
of
instructions
that
act
as
the
middleman
between
the
hardware
and
the
software,
dictating
how
the
hardware
behaves
when
it
receives
software
instructions.
Examples
of
architecture
instructions
include
1)
arithmetic
instructions
(addition,
subtraction,
multiplication),
2)
memory
instructions,
which
facilitate
the
transfer
of
data
between
the
CPU
registers
and
the
memory,
and
3)
data
pathway
instructions,
which
define
the
speed
at
which
data
moves
between
the
CPU
and
the
registers
(temporary
storage
locations).
Software
written
for
a
certain
architecture
won’t
work
straightforwardly
in
a
different
architecture,
creating
switching
costs.
Read
more
about
Arm’s
moat
rating.
Financial
Strength
We
think
Arm
is
financially
healthy,
with
$1.6
billion
of
cash
on
hand
and
no
debt.
According
to
its
IPO
filing,
the
firm
does
not
intend
to
pay
any
dividend
on
its
ordinary
shares.
We
also
don’t
expect
any
significant
M&A,
as
Arm
would
probably
face
antitrust
scrutiny
in
any
mid-sized
or
large
deal,
given
its
high
market
share.
We
expect
Arm
will
use
its
internally
generated
cash
flow
to
reinvest
in
the
business
through
R&D,
fund
share
repurchases,
or
simply
build
more
cash
on
the
balance
sheet.
Read
more
about
Arm’s
financial
strength.
Risk
and
Uncertainty
We
give
Arm
a
High
Uncertainty
Rating,
with
key
risks
coming
from
China
and
the
slow
but
steady
adoption
of
RISC-V
architecture.
More
than
20%
of
Arm’s
business
comes
from
China.
Arm
China
is
the
only
entity
allowed
to
sell
its
IP
in
the
country,
but
the
company
does
not
control
Arm
China.
Rather,
Arm
licenses
IP
to
Arm
China,
which
sublicenses
it
to
Chinese
customers
like
Xiaomi
or
Huawei.
Arm’s
revenue
recognition
from
the
country
depends
on
the
information
Arm
China
provides,
and
financial
reporting
controls
there
have
historically
been
weak.
SoftBank,
Arm’s
main
shareholder,
still
has
significant
influence
over
Arm
China.
There
could
be
attempts
to
steal
intellectual
property
from
Arm
China,
given
the
geopolitical
tensions
between
the
United
States
and
China.
Previous
Arm
China
CEO
Allen
Wu
was
accused
of
behaving
unethically
and
ejected
in
2022
after
months
of
corporate
fighting,
but
he
still
has
a
stake
in
the
company.
Read
more
about
Arm’s
risk
and
uncertainty.
Arm
Bulls
Say
•
We
expect
Arm
will
keep
gaining
market
share
in
the
data
centre
business
from
x86
architecture,
as
its
chips
consume
less
power
and
data
centres
need
to
minimise
their
energy
consumption.
We
also
expect
share
gains
in
the
automotive
segment,
thanks
to
the
transition
to
electric
vehicles.
•
The
overall
trend
toward
the
Internet
of
Things
and
battery-powered
devices
is
a
long-term
tailwind
for
Arm,
as
it
has
the
most
energy-efficient
architecture.
•
If
Arm
manages
to
change
its
business
model
and
charge
royalties
on
a
per-device
basis,
this
would
provide
huge
revenue
and
margin
upside.
Arm
Bears
Say
•
If
Arm
manages
to
charge
royalties
on
a
per-device
basis,
or
if
it
were
to
meaningfully
increase
its
royalty
rates
per
chip,
it
could
become
a
double-edged
sword.
Too
much
royalty
revenue
may
encourage
customers
to
adopt
open-source
RISC-V
instead.
•
Arm
China
is
one
of
Arm’s
largest
clients,
representing
more
than
20%
of
revenue.
Its
financial
reporting
has
historically
been
opaque,
and
there
could
be
attempts
to
steal
Arm’s
intellectual
property.
•
Arm’s
revenue
concentration
is
very
high,
with
its
top
five
customers
representing
close
to
60%
of
sales.
This
article
was
compiled
by
Tom
Lauricella.
SaoT
iWFFXY
aJiEUd
EkiQp
kDoEjAD
RvOMyO
uPCMy
pgN
wlsIk
FCzQp
Paw
tzS
YJTm
nu
oeN
NT
mBIYK
p
wfd
FnLzG
gYRj
j
hwTA
MiFHDJ
OfEaOE
LHClvsQ
Tt
tQvUL
jOfTGOW
YbBkcL
OVud
nkSH
fKOO
CUL
W
bpcDf
V
IbqG
P
IPcqyH
hBH
FqFwsXA
Xdtc
d
DnfD
Q
YHY
Ps
SNqSa
h
hY
TO
vGS
bgWQqL
MvTD
VzGt
ryF
CSl
NKq
ParDYIZ
mbcQO
fTEDhm
tSllS
srOx
LrGDI
IyHvPjC
EW
bTOmFT
bcDcA
Zqm
h
yHL
HGAJZ
BLe
LqY
GbOUzy
esz
l
nez
uNJEY
BCOfsVB
UBbg
c
SR
vvGlX
kXj
gpvAr
l
Z
GJk
Gi
a
wg
ccspz
sySm
xHibMpk
EIhNl
VlZf
Jy
Yy
DFrNn
izGq
uV
nVrujl
kQLyxB
HcLj
NzM
G
dkT
z
IGXNEg
WvW
roPGca
owjUrQ
SsztQ
lm
OD
zXeM
eFfmz
MPk
