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Nvidia Is the Market's Favorite Chip Stock. This Analyst Thinks Arm Belongs in the Same Tier

Dow Jones2023-09-08

Arm is preparing for the biggest initial public offering of the year. Its mooted valuation has attracted some skepticism but there is reason to give the chip-design company the kind of premium garnered by stock market favorite Nvidia, according to analysts at Susquehanna Financial Group.

Arm has been aiming for a valuation of up to $52 billion according to its filings, with American depositary shares priced in a range from $47 to $51 each. Susquehanna's Christopher Rolland was slightly more cautious, putting Arm's valuation at a fair range of $48 billion to $50 billion, with shares priced at $47 to $50 a share.

However, that's still valuing Arm at a premium to other chip stocks. Susquehanna's valuation for Arm is based on an enterprise value-to-sales multiple of 14 times its expected fiscal 2025 sales figure.

That would put Arm just below Nvidia's (ticker: NVDA) EV/Sales multiple of 15 times on the same basis and well ahead of an average of around 10 times for a wider peer group including companies such as Qualcomm $(QCOM)$, Intel $(INTC)$ and Advanced Micro Devices $(AMD)$.

Some market commentators, including Barron's, have suggested Arm could struggle to achieve a significant premium.

However, Rolland said a premium valuation was justified by Arm's expected compound annual revenue growth of 20% through to fiscal 2027 and improving operating margins. While its key smartphone market is sluggish, Susquehanna's analysts are backing Arm to achieve a more diversified revenue mix including cloud computing and increased automotive market share.

"As Arm iterates ... we see continued opportunity for core improvements, driving up license fees and chip ASPs [average selling prices]," wrote Rolland.

There are risks to Arm's growth, including its exposure to China where it relies on an independent company to conduct sales, and the growth of open-source RISC-V chip architecture which is used by companies that want to avoid paying royalties to Arm. However, Rolland noted Arm's designs come at a fraction of the cost of developing original intellectual property and it has a global community of software developers familiar with its designs.

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  • LeonardKSW
    ·2023-09-08
    Haha..soon Hwawei chips..
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