Down 32% in the last month, the current decline in British microchip and semiconductor company Arm Holdings (NASDAQ:ARM) is a buying opportunity. As a result, investors are setting their sights on Arm Holdings stock. However, should you?
Arm Holdings, whose microchips can be found in nearly every smartphone, has been on a tear since the company held its initial public offering (IPO) in September 2023. Since its market debut less than 12 months ago, Arm Holdings stock has risen an impressive 93%. And that’s after the pullback that has occurred with the broader market in the last two months. The stock’s performance has been strong enough to get it added to the Nasdaq 100 index.
Looking forward, there are plenty of reasons to remain bullish on this leading chip stock and its future.
Strong Growth
On Aug. 1, Arm Holdings issued second-quarter financial results that showed strong growth at the company. Arm reported EPS of 40 cents versus 34 cents that had been forecast on Wall Street. Revenue totaled $939 million, which beat consensus estimates of $902.7 million. Arm’s revenue was up 39% from a year earlier. Management said the company continues to benefit from strong global demand. The demand for its chips and processors that are used in smartphones and artificial intelligence (AI) applications.
Despite the good news, ARM stock got knocked 10% lower after the company issued forward guidance. This disappointed analysts and investors. Specifically, Arm Holdings maintained its full-year guidance. It calls for $1.45 to $1.65 in EPS and $3.80 billion to $4.10 billion in revenue. Analysts expected $1.58 in earnings and sales of $4.02 billion. The guidance is still ahead of what Wall Street had been seeking. However, management’s failure to lift its outlook overshadowed what was otherwise a great print.
Reporting Change
It also didn’t help that Arm said that it is no longer going to report the number of microchips that it ships globally, starting in the current third quarter. “As we shift our focus to higher-value, lower-volume markets such as data center servers, AI accelerators and smartphone applications processors, the number of chips reported as shipped is less representative of our performance,” said the company in its earnings release.
For the record, Arm shipped seven billion microchips in this year’s second quarter. Going forward, Arm said it plans to focus more on the royalty revenue it generates from its microchips and processors. The company currently has 33 microchip and semiconductor licenses. It earns regular royalty fees from these licenses. Still, the changes to Arm’s financial reporting structure have caused a negative reaction from many investors and analysts.
Bullish Calls
Despite the grumblings about the change to its reporting structure, analysts largely remain bullish on ARM stock and continue to upgrade their ratings and price targets. Morgan Stanley (NYSE:MS), for example, recently upgraded Arm stock to a “buy” rating from “hold” previously and increased its price target to $190 a share from $107. Morgan Stanley’s price target is 62% higher than where Arm’s shares currently trade.
Analysts at Morgan Stanley say that Arm continues to have a big opportunity and catalyst with AI computing moving to the edge in mobile, automotive, and personal computers. Overall, ARM stock currently has a “moderate buy” rating with 14 analysts rating the stock a “buy,” four analysts rating it a “hold” and one analyst labeling it a “sell.” The median price target on Arm stock is 20% higher than where it currently trades.
Buy ARM Stock
Most microchip and semiconductor stocks are experiencing a drawdown right now as the hype surrounding AI cools off and investors rotate capital out of tech stocks and into small-cap securities. Nvidia’s (NASDAQ:NVDA) stock has dropped 18% in the last month. The pullback in Arm stock has been exacerbated by the company maintaining its guidance and announcing changes to its reporting structure. But these are all near-term headwinds. In the long term, Arm Holdings stock is still a leading microchip design company and well-positioned for future growth. ARM stock is a buy.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
On the date of publication, Joel Baglole held a long position in NVDA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
