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ARM Holdings: another firm looking to join the AI giants

British IT firm ARM Holdings, a subsidiary of SoftBank Group, plans to get involved in the development of chips for artificial intelligence (AI), thus involving the conglomerate in the global race we have witnessed in recent years. Although this company's earnings results beat expectations, its earnings guidance for the year ahead was slightly disappointing. Whether it has a great future ahead of it will become apparent in the year ahead.

About ARM Holdings

ARM Holdings is a global technology company founded in 1990 and headquartered in Cambridge, UK. Its main domain at the moment is processor architecture used in a wide range of devices, from smartphones and tablets to smart homes and cars. The ARM architecture provides energy-efficient solutions that enable high performance with minimal power consumption. ARM is not a chip manufacturer, but instead licenses the manufacturing of its technology to other companies, allowing for flexibility and scalability. In 2016, ARM Holdings was acquired by the Japanese company SoftBank Group, which now holds a 90% stake, giving it an even greater global presence and the financial resources to further develop and innovate. ARM went public on NASDAQ with its initial public offering in September 2023.[1]

A vision for leadership in AI

ARM Holdings would like to unveil a prototype of its AI chip as early as next spring and then plans to put it into mass production in the fall. The Asia Nikkei portal reported that the firm is setting up a separate division for this purpose. Parent company SoftBank is already trying to secure production capacity from chipmakers like TSMC. This initiative represents the first part of SoftBank's major investment in AI technology, which will total $64 billion. The goal and vision of SoftBank's CEO, Masayoshi Son, is to build an AI conglomerate that will be able to compete with other tech giants. Analysts at Macquarie Group believe that given ARM's important role in this plan, SoftBank should maintain its stable ownership in the company in the near term.[2]

Impressive economic results

In the fourth quarter of FY 2024, ARM Holdings achieved a remarkable $928 million in revenue, up 47% from the previous year, with profit rising to $224 million. The growth was mainly driven by record licensing revenue. The company's full-year results were equally impressive, with revenues of US$3.23 billion and net profit of US$306 million. In addition to royalties, ARM's revenue also grew due to the widespread adoption of their v9 processor technology and increased research and focus on artificial intelligence. [3]

Earnings prospects have disappointed some investors

The firm provided revenue guidance for fiscal year 2025 with an average estimate of $3.95 billion, which was slightly below the expected $4 billion. Although they forecast fewer orders compared to the previous year, revenue growth should be largely attributed to their robust licensing business, which is supported by demand for hardware capable of powering the computing power of AI technologies. In addition, ARM is optimistic about its prospects in the data center market and expects a significant increase in market share in the personal computing sector. Despite potential challenges in certain sectors, ARM's overall outlook remains positive, reflecting its successful strategies and the increasing demand for AI technologies in various industries.[4]

Share price development

From the beginning of 2024 through today (May 14), ARM Holdings shares have gained approximately 70% on the NASDAQ.*[5] Investment bank Evercore ISI recently adjusted its target price on the stock to $145 from the original $156.00, but still maintained an "Outperform" rating on the stock (beats expectations). This decision followed ARM's strong rise, which far outpaced the S&P 500's year-to-date gain. The bank continues to maintain a positive outlook for ARM Holdings over the next year, but expects a potential correction in the near term on the basis that investors could pick up the gains from their recent surge. Evercore ISI remains optimistic about ARM Holdings' long-term prospects as well, highlighting its overall performance and potential.[6]


Snímek obrazovky 2024-05-15 v 15.59.35

ARM Holdings share price development since its IPO (Source: Google Finance)*

Conclusion

ARM Holdings has received significant backing from parent company SoftBank, which plans to become a major player in the world of artificial intelligence. Despite the tremendous growth of this technology, there are also some doubts about the over-investment in AI and its returns in the short term. However, judging by the financial results so far, ARM seems to be improving its market position.

Adam Austera, Principal Analyst at Ozios

[*] Past performance is no guarantee of future results

[1] https://www.arm.com/company

[2] https://www.investing.com/news/stock-market-news/arm-planning-to-launch-its-own-ai-chips-macquarie-weighs-in-432SI-3437277

[3] https://investors.arm.com/static-files/0c5f0128-b149-4196-9ef6-3c618ec2782b

[4] https://www.investing.com/news/stock-market-news/earnings-call-arm-reports-record-q4-revenue-bullish-on-aidriven-growth-93CH-3432682

[5] https://www.google.com/finance/quote/ARM:NASDAQ?window=YTD

[6] https://www.investing.com/news/company-news/evercore-isi-reduces-arm-holdings-shares-target-amid-market-rally-and-earnings-beat-93CH-3430752

Disclaimer:

The material herein is considered as marketing communication under the relevant laws and regulations, and as such is not a subject to any prohibition on dealing ahead of the dissemination of investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and should not be construed as containing investment advice, or an investment recommendation, or an offer of or solicitation for any transactions in financial instruments. The published content is intended for educational/informational purposes only. It does not take into account readers’ financial situation, personal experience or investment objectives. APME FX Trading Europe Ltd makes no representation that the information provided is accurate, current or complete; and therefore, assumes no liability for any losses arising from investments based on the supplied content. The past performance is not a guarantee of future results.

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