6. Arm Holdings plc (NASDAQ:ARM)
Number of Hedge Fund Shareholders In Q1 2024: 29
Arm Holdings plc (NASDAQ:ARM) is a British semiconductor design firm whose design rules are used in products made by QUALCOMM, Samsung, and others. Speaking of Arm Holdings plc (NASDAQ:ARM) and Goldman Sachs, the bank was out with a fresh note for the stock in June 2024. This saw Goldman raise Arm Holdings plc (NASDAQ:ARM)’s share price target to $143 from $110 and keep a Buy rating for the shares. The bank explained that edge data center computing is well suited to Arm Holdings plc (NASDAQ:ARM)’s processor designs, and through its fiscal year 2027, the firm should achieve a 24% compounded annual growth rate for its revenue and a 30% growth rate for its EPS.
Looking at these growth rates, Arm Holdings plc (NASDAQ:ARM)’s forward P/E of a whopping 103.09 is unsurprising. This is nearly 5x the S&P’s 21, and hints at expectations of an explosive growth in the future. Here’s what Bireme Capital had to say for Arm Holdings plc (NASDAQ:ARM) in its Q4 2023 investor letter:
Another stock we bet against in the second half of 2023 was ARM Holdings. We nd the valuation to be far too rich at more than 20x sales and 100x FY 2023 operating income. To garner such a large multiple in the public markets, majority owner Softbank seems to have pulled out all the short-term levers at its disposal. From the FT:
“Arm is seeking to raise prices for its chip designs as the SoftBank-owned group aims to boost revenues ahead of a hotly anticipated initial public oering in New York this year. The UK-based group, which designs blueprints for semiconductors found in more than 95 per cent of all smartphones, has recently informed several of its biggest customers of a radical shift to its business model, according to several industry executives and former employees. These people said Arm planned to stop charging chipmakers royalties for using its designs based on a chip’s value and instead charge device makers based on the value of the device. This should mean the company earns several times more for each design it sells, as the average smartphone is vastly more expensive than a chip.”
In our view this was a transparent attempt to boost revenue growth ahead of the IPO. This might work as a one-time boost to sales, but it is not sustainable and will anger and alienate customers. ARM’s largest customers increasingly choose to license just the ARM instruction set architecture (ISA) rather than purchase ARM’s o-the-shelf chip designs. They prefer to design their own chips so they can better optimize their hardware with their software, as Apple has done to great effect with its custom silicon. It is hard to imagine ARM getting signicantly more revenue share while their value-add diminishes.
