ARM Holdings (ARM) Preview- Can it grow into its lofty valuation?
In the fast-paced world of technology, ARM Holdings (ARM) has become a key player in the design and development of power-efficient CPUs. With a strong focus on AI- capable and visually immersive technologies, ARM's instruction sets have been licensed to various partners for custom chip development.
ARM Holdings reports Q3 earnings tonight after the close. Analysts are looking for ARM to post EPS of $0.25 and revenue of $762.99 million. The company had previously given a Q3 sales outlook below Wall Street estimates due to a large deal expected to close later than initially planned, which resulted in an 8% drop in shares to $50 on November 7. ARM Holdings projected sales for fiscal year 2024 to reach a midpoint of $3.02 billion, which surpassed analyst estimates.
Shares have rebounded as ARM has benefited from the momentum in AI. Its stock is up 56% since its Q2 earnings release but the rally has run out of steam in 2024. ARM is up slightly on the year (+0.25%) but has been unable to break above the $80 level. It will need a strong report and guidance to generate a move above the current all-time high ($79.96).
While ARM Holdings met earnings expectations in the previous quarter, the guidance provided left some investors disappointed, leading to concerns regarding the company's valuation and sustainable growth narrative. Current analyst Q4 expectations guidance issued indicates a sequential increase in revenues of 2.5%.
Analysts anticipate positive long-term value commentary regarding Arm-based servers and laptops, but they believe significant recovery in royalty rates may be delayed until FY25. Wells Fargo expects moderate-to-high single-digit growth in quarterly royalties, primarily driven by strong mobile-related royalties, potentially benefiting operational margins.
As of February 6, 2024, Arm Holdings' stock closed at $72.98 per share, exhibiting a 3.12% one-month return. However, YTD shares experienced a decline of 2.88%, resulting in a market capitalization of $74.821 billion.
Trading at a forward P/E ratio of 54.35,Arm Holdings' valuation surpasses that of the S&P 500's current forward P/E of 22.29. Additionally, with a trailing twelve-month P/E of 415.67, Arm Holdings stands as a relatively expensive option compared to its peers within the Technology sector, which has an aggregate price-to-earnings ratio of 38.68. Investors should weigh this premium against potential future growth opportunities.
Investors should be aware that ARM Holdings' lock-up expiration is set for March 12, 2024. This event can potentially create volatility in the stock's price and may be a critical factor to consider when making investment decisions.
ARM Holdings possesses significant growth potential as a leading CPU technology company and trusted partner within the semiconductor industry. While it faced challenges with guidance and delayed deals, ARM Holdings has projected strong sales for fiscal year 2024. Analysts anticipate positive long-term value commentary and moderate improvements in royalties, particularly in the mobile sector. Investors must consider the company's premium valuation compared to industry peers and monitor the potential impact of the upcoming lock-up expiration. Armed with these insights, investors can make well-informed decisions regarding their investment in ARM Holdings (ARM).