With the highly anticipated Arm (NASDAQ:ARM) initial public offering ( ) today, one analyst has already put out a “buy” rating on ARM stock
Indeed, NewStreet Research analyst Pierre Ferragu has put out a $59 price target on the chip designer, giving the company a “buy” rating ahead of its Nasdaq debut. According to Ferragu, there are three major reasons for his bullish take on Arm.
Firstly, the analyst believes that Arm boasts a “high-quality financial model” in which it receives royalties from chipmakers for the use of its semiconductor designs. This is essentially the equivalent of a money press, given the wide variety of use cases for chips in 2023.
“Incremental royalty revenue are pure profits, resulting in fast margin expansion, negligible reinvestments, and free-cash-flow growth,” Ferragu wrote, per Barron’s.
Additionally, the analyst believes that Arm is choosing the perfect moment to go forward with its IPO, optimizing its chance at faster growth.
“The IPO happens at a low in the smartphone market, as penetration accelerates in networking, cloud, and autos, and in the early days of the migration to the v9 architecture.”
Finally, Ferragu believes that Arm’s valuation is increasingly reasonable. He predicts Arm will be worth $82 billion within the next three years, “based on a multiple of 27 times royalty revenue and 40 times pretax earnings, with royalty revenue growing midteens.” Indeed, the analyst believes Arm is on the precipice of a growth spree.
ARM Stock Price Opening at $51 in IPO
ARM has announced its opening price at $51 per share in its public debut, the top end of its estimated valuation between $47 and $51 per share. This should offer the company a valuation of more than $52 billion.
Arm has long been considered a potential gold mine for investors. The company essentially owns licenses on many of the most popular chip designs in the world, including the kinds used in the likes smartphones, processors and many of Apple’s (NASDAQ:AAPL) products.
Accordingly, today’s IPO marks one of the year’s most anticipated public debuts.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.