Arm
,
the
British
semiconductor
design
company,
has
seen
its
share
price
skyrocket
since
reporting
third-quarter
earnings
in
February.
The
stock
has
risen
by
65%
this
year,
driven
by
what
Morningstar
calls
the
“AI
buzzword”
narrative
and
the
company’s
ability
to
increase
royalty
fees
after
its
latest
chip
architecture
launch.
Arm
develops
and
designs
the
blueprints
for
microprocessors
and
counts
companies
like
Nvidia
and
Apple
as
some
of
its
biggest
customers.
The
company’s
business
model
relies
on
licensing
revenue
—
or
royalties
—
for
every
chip
its
customers
produce
using
its
designs.
However,
Morningstar
believes
the
current
share
price
is
overvalued
and
could
drop
by
54%
to
$57.
ARM
YTD
mountain
“After
the
company
reported
earnings
on
Feb.
7,
its
shares
soared
more
than
50%
and
have
traded
close
to
$140
since,
propelled
by
an
exaggerated
artificial
intelligence
narrative
combined
with
excitement
about
recent
increases
in
royalty
rates
after
the
introduction
of
its
newest
architecture,
Armv9,”
said
Morningstar
analyst
Javier
Correonero
in
a
note
to
clients
on
Mar.
28.
AI
is
‘ancillary’
for
Arm
While
acknowledging
that
Arm
is
executing
well
and
benefiting
from
the
growth
in
artificial
intelligence,
Morningstar
said
that
the
company’s
AI
story
is
“ancillary”
compared
to
that
of
Nvidia,
a
big
beneficiary
of
AI
chip
sales.
The
research
firm
does
not
expect
Arm
to
experience
earnings
growth
“anywhere
close
to
that
of
Nvidia.”
Morningstar’s
price
target
for
Arm,
which
the
firm
calls
a
fair
value
estimate,
is
$57
per
share.
This
assumes
a
17%
annual
growth
rate
over
the
next
decade
and
a
top-end
profit
margin
of
44%.
In
contrast,
the
research
firm
believes
the
current
share
price
implies
a
22%
revenue
growth
rate
and
a
55%
operating
profit
margin.
Morningstar’s
analyst
said
that
while
this
scenario
would
provide
a
short-term
boost
to
Arm’s
financials,
it
would
create
long-term
risks
by
requiring
the
company
to
raise
its
royalty
rate
by
four
times
in
just
eight
years,
potentially
pushing
customers
to
seek
alternative
and
cheaper
architectures.
Morningstar
is
not
alone
in
its
bearish
view.
The
consensus
price
target
of
31
analysts
covering
Arm
polled
by
FactSet
points
to
a
14%
downside.
Arm
declined
to
comment
when
contacted
by
CNBC
Pro.
The
bullish
view
In
contrast,
Mizuho
Securities
takes
a
more
optimistic
view
of
Arm’s
long-term
prospects.
The
research
firm
has
raised
its
price
target
for
Arm
to
$160,
representing
28%
upside
from
current
levels.
The
investment
bank
believes
the
Arm’s
revenues
will
grow
by
25%
annually
for
three
years
from
2025,
significantly
higher
than
Morningstar
and
the
consensus
view.
Mizuho
Securities
highlights
a
number
of
reasons
for
its
bullish
stance
on
Arm.
“ARM
remains
the
unquestioned
leader
in
the
mobile
CPU
space
with
>
99%
market
share,
and
we
see
potential
for
further
revenue
ramps
as
more
OEMs
move
to
v9
platforms
over
the
next
3
years,”
said
Mizuho
analysts
led
by
Vijay
Rakesh
in
a
note
to
clients
on
Mar.
6.
