An analyst at Bernstein, who did not participate in the initial public offering (IPO) of Arm Holdings PLC, has provided an early evaluation of the company’s stock. Despite the recent hype around Arm’s potential growth in the artificial intelligence (AI) sector, the analyst remains skeptical.
In a note to clients on Monday, Bernstein’s Sara Russo expressed her reservations, stating, “While there are expectations that Arm will benefit from the AI boom, we believe it is premature to declare them as an AI champion.” She further noted, “Moreover, we are more cautious about their ability to achieve the projected increase in royalty rates within the timeframe set by management.”
Arm’s U.S.-listed shares (ARM) debuted on Thursday, closing Friday at $60.75 per share, representing a 19% increase from the IPO price of $51. However, the stock has experienced a decline of over 3% during Monday’s pre-market trading.
Russo initiated coverage of Arm with an underperform rating and set a target price of $46, indicating a potential downside for the chip designer’s shares.
One of Russo’s concerns revolves around Arm’s long-term royalty outlook. While management anticipates reaching 5% royalties by FY26, she believes it will take longer to achieve this milestone. Russo predicts that Arm will approach ~4% royalties by FY27, with a gradual increase thereafter.
Additionally, Russo expressed apprehension about RISC-V, an open-source alternative to Arm’s technology.
Through a critical and cautious lens, Bernstein’s analysis provides valuable insights into Arm Holdings PLC’s stock performance and raises important considerations for investors.
The Growing Success of Open Source Software
Open source software has proven to be a successful model in the tech industry, and Linux stands out as a prime example. With Linux’s growth from an open-source alternative to a significant commercial success, it’s clear that this approach has immense potential.
RISC-V: The Linux of the Hardware Market
Many experts, including Russo, see RISC-V as the equivalent of Linux but for the hardware market. By adopting this open-source technology, companies can establish themselves as specialists and assist others in capitalizing on its benefits.
The Rise of RISC-V Specialists
Similar to how Red Hat successfully developed a commercial operation that allowed enterprises to leverage the advantages of open source in a scalable manner, the abundance of RISC-V specialists is expected to give rise to numerous similar success stories. These specialists, acting as “Red Hats” for RISC-V, will find commercial success by basing their designs on this revolutionary technology.
Arm’s IPO and the Tech Industry
The recent announcement of SoftBank’s Arm going public has generated a lot of buzz. However, there is no denying that the company faces a rapidly growing threat in the industry.
The Post-Smartphone Era and the Future of Tech IPOs
While Arm’s architecture has been the foundation of smartphones, experts believe that we are entering a post-smartphone era. They anticipate that high-performance computing and the Internet of Things (IoT) will lead the next phase of semiconductor growth.
According to FactSet, there are three analysts who already cover Arm’s stock. Among them is Charles Shi from Needham, who believes in Arm’s potential but assigns a hold rating. Pierre Ferragu from New Street Research holds a bullish stance on the company’s prospects.