Key points
- Arm Holdings designs the architecture of the processors, patents them, licenses them and collects royalties from the world’s largest chipmakers, including Taiwan Semiconductor, Intel, Nvidia, Apple and Samsung.
- Its major clients are also strategic investors, and Softbank owns 90% of Arm Holdings’ shares.
- Artificial intelligence, cloud computing and automotive tailwinds continue to drive royalties as Arm Holdings moves to a subscription-based licensing model called Arm Total Access (ATA), which has already grown to include 27 of the largest largest semiconductor companies in the world.
- 5 stocks we like best from ARM
Arm Holdings plc NASDAQ: ARM is a British semiconductor company with a virtual lock on the majority of mobile computer chips produced worldwide. Estimates indicate that Arm has a 90% market share in mobile processors used in smartphones, tablets and smartwatches. Arm continues to increase its market share in servers, laptops and Internet of Things (IoT) devices driven by artificial intelligence (AI), cloud computing and automotive drivers.
Arm’s intellectual property (IP) focuses significantly on energy-efficient CPUs used in portable devices. Since they don’t have the expenses to make chips or own factories, Arm is a profitable, low-asset, high-margin, capex, computer and technology company.
Legacy licensing and royalty model
While Arm is a semiconductor company, it doesn’t actually make or manufacture computer chips. It designs and patents processor architecture licenses, licenses intellectual property (IP) for semiconductor companies, and collects royalties. The license comes with a one-time upfront fee, and royalties are payments made to Arm-based on each chip sold that uses the licensed architecture. Some of his well-known clients include Advanced Micro Devices Inc. NASDAQ:AMD, Qualcomm Inc. NASDAQ:QCOM, Broadcom Inc. NASDAQ: AVGO and Huawei.
Migration to the subscription licensing model
Like many tech companies, including Pure Storage Inc. New York Stock Exchange: PSTG AND C3.ai Inc. NYSE:AI, which have adopted the subscription model, Arm is also moving to a subscription-based licensing model called Arm Total Access (ATA) licensing. The company has 27 ATA licensees, up from 22 in the previous quarter. V9 royalties are expected to generate double the revenue compared to V8 projects. This is attributed to higher average rate increases of 3% to 5%, higher core counts, and higher average selling prices (ASPs). Check the heat map of the sector on MarketBeat.
Survive the block expiration
Arm had its first lock-up expiration on March 11, 2024. Shares didn’t fall too much. SoftBank Co. OTCMKTS: SOBKY it owns a 90% stake in Arm and has not indicated it is a material seller. The other investors mainly consist of strategic investors who are also customers, including Nvidia Co. NASDAQ:NVDA, The Apple company. NASDAQ:AAPL, Taiwan Semiconductor Manufacturing Ltd. New York Stock Exchange: TSM, Samsung Electronics Co. Ltd. OTCMKTS: SSNLF AND Intel Co. NASDAQ: INTC.
Swing and a home run
On February 7, 2024, Arm reported fiscal third-quarter 2024 EPS of 29 cents, beating consensus analyst estimates of 25 cents by 4 cents. Revenue increased 13.8% year-over-year to $824 million versus consensus estimates of $762.5 million.
Raised guide for arm positions
Arm issued upward guidance for fiscal fourth-quarter 2024 EPS of 28 cents to 32 cents versus analysts’ consensus estimates of 20 cents. Expected revenues are in the range of $850 million to $900 million versus consensus estimates of $778.83 million.
The virtuous cycle of monopoly drives the growth of market shares
Royalty revenues will drive growth as computing demand continues to grow as the performance requirements of computers and electronic devices increase. The benefits of AI became very apparent in the quarter as demand for anything that assists chips with AI acceleration skyrocketed.
As more and more Arm-based chips are put into more products, more software is written for them, which in turn increases demand for Arm-based chips. This cumulative effect increases market share and increases royalty revenue. Arm V9 technology contributed 15% of total royalty revenue, up from 10% in the previous quarter.
Arm CEO Rene Haas commented: “Arm has the most fundamental and fundamental pervasive computing platform in the history of digital design. Over 280 billion units have been built in the 30+ years that Arm has been a company. And that has supported a software ecosystem and a hardware ecosystem like no other.”
Hass continued: “And because the design of a CPU is truly driven by hardware and software, it creates a driving force for continuous development. This means that the more hardware that exists on Arm, the more software that is written for Arm, the more software that is written for Arm, the more popular the hardware is.”
A game changer for AI data center processors
Arm has revealed details of two Neoverse compute subsystems that can reduce data center chip development times to less than a year. Computational Subsystems (CSS) are complete, finished design blocks put together for end customers, saving them significant amounts of time in validating engineering work and time to market.
Arm Neoverse CSS V3 has a 50% performance improvement and Neoverse CSS N3 provides 20% higher performance per watt than the previous version. Both are based on the third generation Neoverse IP. New computing subsystems can handle the massive processing loads needed to handle AI applications.
Arm Holdings analyst ratings and price targets I’m on MarketBeat. Arm Holdings peers and competitor actions can be found with MarketBeat Stock Screener.
Daily banner template
The daily candlestick chart on ARM illustrates a pennant pattern. The pennant is composed of lower highs and higher lows, with the descending upper trend line meeting the ascending lower trend line at the apex point. A break of one of the trend lines triggers the breakout or breakdown. Although it looks like a symmetrical triangle, a pennant has a flagpole composed of a strong parabolic rise preceding the symmetrical triangle.
ARM began its flag swing at $46.50 on October 23, 2023, reaching a high of $164.00 on February 12, 2024, prior to the pennant. The daily relative strength index (RSI) is attempting to rise above the 60 band. The pullback support levels are at $121.38, $102.09, $94.00, and $77.71.
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