Arm stock: Wall Street sees upside potential from new strategy

Key takeaways

• Wave of brokers have initiated coverage on Arm after the quiet period following its IPO expired
• Initial coverage was muted, but average target price now implies around 11% potential upside as more optimistic views start to feed through
• Arm still trades at a big premium, but most analysts believe the strength of its core business and new strategy justifies this and can deliver growth
• Arm shares have flirted with its IPO price since listing but has remained in positive territory
• New ratings should support share price, but gains could still be limited in the near-term

Arm stock faces Wall Street judgement

This could be a big week for British semiconductor designer Arm, which completed its blockbuster IPO last month. Around 30 major banks are able to publish their view on the company from this week after the quiet period following Arm’s listing expired, and many have wasted no time in initiating coverage this morning.

That means we are getting fresh insight into exactly what analysts at major banks think about Arm’s business, prospects and, most importantly, valuation. The initial view from the few big banks that were not beholden to the quiet period was muted, with the consensus being that there isn’t much upside potential from current levels.

However, we have already seen that some have a rosier view. Here are the latest ratings and price targets for Arm set on Monday morning:

• Citigroup: Buy rating and a $65 price target
• Barclays: Overweight rating and $65 price target
• BNPP Exane: Outperform and $65 price target
• Jefferies: Buy rating and $64 price target
• Cowen & Co: Outperform rating and a $63 price target
• Goldman Sachs: Buy rating with a $62 price target
• Mizuho: Buy and $62 price target
• BMO: Market Perform rating and $60 price target
• Deutsche Bank: Buy rating and $60 price target
• HSBC: Hold rating and a $57 price target

All-in-all, the average target price on Arm now sits at $60, according to a Bloomberg-compiled consensus of 14 brokers. That is about 11% higher than where Arm shares ended play on Friday. For more context, the range now spans from as low as $46 to as high as $65.

What will this mean for Arm stock?

Arm shares closed at just above $54 on Friday, only marginally above its $51 IPO price. That means Arm is still trading at over 100x earnings based on its most recent annual results, giving it a huge premium over its rivals and the broader market.

Arm convinced Wall Street during its IPO roadshow that it should earn a premium because it has  a new strategy that will see it supply more comprehensive and advanced chip designs for hot areas like AI and electric vehicles that can earn higher royalties. However, the valuation remains stretched based on the business today, which is known for having a monopoly supplying generic designs for more basic chips used in consumer electronics such as smartphones.

The brokers that initiated coverage this morning were, broadly speaking, optimistic that Arm can at least maintain if not grow this premium valuation.

Barclays said Arm is well-positioned to grow as more devices become ‘smart’ and said it sees a roadmap for the company to grow EPS to over $3 by 2030. That would be almost six-times as high as the $0.52 delivered in the most recent financial year! Jefferies agreed and said the move to higher-performance chips for datacenters and GPUs will boost royalties over what it earns on supplying CPUs for smartphones. Cowen & Co said Arm is not fully monetizing its market value, which was a point stressed by Arm’s management during the IPO roadshow.

You can read my analysis on Arm and its new strategy in Can Arm Stock Sustain or Grow its Premium Valuation?

Where next for Arm stock?

It is very early days for Arm stock, so the daily chart does not provide much insight as to where the share price is headed next. Still, it is worth checking in to show how Arm shares have performed since going public. We believe the key levels to watch are the IPO price of $51 and the average target price at $60. In-between, a move above $57 would allow it to break above the peak set since the share price stabilised after its listing. 

The stock is trading up 0.5% in early premarket trade this morning.