Arm Holdings: Back To Reality

Seeking Alpha04-29

Arm Holdings is expected to benefit from the growing demand for AI chips and shifts away from x86 infrastructure.The company's revenue is primarily driven by royalty rates for chip shipments, which ...

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Zicco
04-29
Zicco
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Alpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Arm Holdings is expected to benefit from the growing demand for AI chips and shifts away from x86 infrastructure.The company's revenue is primarily driven by royalty rates for chip shipments, which ...</p>\n\n<a href=\"https://seekingalpha.com/article/4687105-arm-holdings-back-to-reality\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"IE00B3M56506.USD","symbol_name":"NEUBERGER BERMAN EMERGING MARKETS EQUITY \"A\" (USD) ACC","start_time":0,"source_url":"https://seekingalpha.com/article/4687105-arm-holdings-back-to-reality","article_id":"2430682890","we_media_id":null,"thumbnails":[],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2430682890","pubTimestamp":1714356000,"columns":[],"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Arm Holdings is expected to benefit from the growing 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estimate of $57 using aggressive royalty rate growth.Michael ViArm Holdings plc (NASDAQ:ARM) is expected to have a strong future, but investors still have to buy the stock at the right price. The AI chip boom shows no signs of slowing down, and the chip design company should benefit from further shifts away from the x86 infrastructure. My investment thesis remains Bearish on the stock, still trading above $100 and an extreme valuation multiple.Source: FinvizBack Below $100ARM was probably the most irrational AI stock over the last 6 months of hype. The chip design company definitely benefits from the growing demand for AI chips and companies looking for internal chip solutions use the ARM design reference due to the high performance per watt.The issue is that AI GPUs are relatively low-volume chips compared to billions of smartphones and PCs sold each year. The xAI business from Elon Musk only has 20,000 H100 GPUs from Nvidia (NVDA) and apparently needs 100,000 for Grok 3.0.Even at $30K a GPU, xAI would spend $2.4 billion on the 80K additional GPUs, but the company is only buying 80,000 GPUs. A large corporation has 100,000 PCs with employees using a similar number of smartphones.ARM gets paid a royalty rate for each chip produced based on the reference data. Investors only need to look at the chip shipments each quarter. The numbers are reported a quarter in arrears, but ARM only reported 7.7 billion chips shipped for FQ3'24, down from the 7.9 billion in the prior December quarter.ARM Holdings FQ3'24 presentation\" title=\"Source: ARM Holdings FQ3'24 presentation\" tg-width=\"640\" tg-height=\"357\"/>Source: ARM Holdings FQ3'24 presentationThe problem here is that Nvidia and Advanced Micro Devices (AMD) are discussing selling millions of GPUs, not billions or even hundred of millions. ARM recently doubled the royalty rate for new Armv9 technology versus the prior Armv8 technology, but the company only saw 15% of revenues from the new technology in the last quarter.Back with the IPO registration, ARM suggested the semiconductor TAM was $202.5 billion in 2022, growing at up to 7% annually. The company has nearly 50% of the semiconductor market on ARM-based chips, with a target of reaching just below $250 billion in TAM by 2025.ARM estimated the 2022 license rate of 1.7% leading to around $1.7 billion in royalty revenue based on this calculation. The LTM royalty revenues were only $1.66 billion due in part to a global inventory correction during FQ4'23 quarter through FQ2'24 quarters.Investors need to understand premium smartphones and AI GPUs are already on the v9 technology. As CFO Jason Child highlighted on the FQ3'24 earnings call, ARM is much more positioned towards smartphones on the v9 technology right now:...in terms of royalty revenue and then chips that have actually been deployed in the market, we are overweighted towards smartphones on v9 primarily because it's an annual refresh cycle.The chip shipments are reported a quarter in arrears when Nvidia reported FQ3'23 sales of $18 billion for the October quarter. The sales numbers don't capture the big jump to $22 billion in sales for the January quarter and a further forecasted jump to $24 billion in the April quarter, but ARM royalty revenues should already capture the massive jump from the trough sales levels in the prior year.In addition, ARM only guided royalty revenues up to ~$490 million in the current March quarter based on 30% growth over the FQ4'23 level of $374 million and a mid-single digit sequential growth rate. The company is forecast to report total sales of $850 to $900 million in the quarter on May 8 depending on licensing deals for the quarter.Investors need to note the increased royalty revenue is again targeted to come from higher royalty rates for the v9 technology, not so much from more AI chips. Per the CFO on the earnings call:Royalty revenue sequential growth is mainly coming from increasing penetration of Armv9, where royalty rates are on average, at least double the rates on equivalent Armv8 products.It's important to understand that ARM reported prior peak royalty revenue of $442 million back in FQ2'23. The targeted sales for the current quarter is only set to grow in the 10% range over the last 18 months despite the booming demand for AI GPU chips during this period.Still Too ExpensiveARM has fallen over $60 from the highs, yet the stock is still vastly too expensive. Morningstar forecasts a $57 fair value for the stock and the valuation likely assumes an aggressive royalty rate in 2030.Morningstar has forecast the 1.7% royalty rate reaches 5% by 2030, suggesting further increases in rates for the next generation v10 technology. Even under this analysis of what would appear some aggressive increases in royalty rates, the research only leads to 17% annual sales growth rates.Our $57 fair value estimate addresses this paradox. It assumes Arm will need to invest $15 billion in R&D in the next seven years, or 33% of revenue on average, to reach a 5% blended royalty rate by 2030 and 6% in 2033. This will result in a 17% revenue CAGR and a 44% terminal GAAP operating margin in the next decade.Analysts generally forecast 20% to 25% growth rates in the next few years, while the stock trades at 81x EPS targets. Investors need to understand ARM is already a well-developed company with 7 billion chips shipped quarterly based on their technology.ARM already has an impressive gross margin of over 95% while Nvidia is at 76%. The major difference is that Nvidia captures the full value of the GPU sales while ARM just obtains a small royalty fee plus a license fee.Data by YChartsNvidia quarterly sales are topping $24 billion, while ARM is looking to just top $0.9 billion. The chip design company has impressive results, but the sales volumes aren't very large.TakeawayThe key investor takeaway is that the stock is just far too expensive for what ARM delivers to shareholders, high margins or not. The stock came public around the Morningstar price target, and investors should assume this target might actually be aggressive, with no indication the market will support royalty rates to effectively triple from 2022 through 2030.Investors should assume it's not too late to dump ARM.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[{"id":300418760810656,"gmtCreate":1714363847691,"gmtModify":1714363849636,"author":{"id":"4147642889264222","authorId":"4147642889264222","name":"Zicco","avatar":"https://community-static.tradeup.com/news/49838eba77bd7118e01c47ad1c1d0ca6","vip":1,"crmLevel":1,"crmLevelSwitch":0,"idStr":"4147642889264222","authorIdStr":"4147642889264222"},"htmlText":"👍🏼","listText":"👍🏼","text":"👍🏼","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/300418760810656","repostId":2430682890,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":3,"commentSize":1,"repostSize":1,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2430682890"}