Why Arm's stock just nabbed a new bullish call, even after doubling this year

By Emily Bary

Raymond James is upbeat about Arm's potential to capitalize on a host of AI trends, including the new iPhone 16

Though Arm Holdings PLC shares have doubled on the year, they still look attractive in the view of Raymond James analyst Srini Pajjuri.

He initiated coverage of the chip designer's stock with an outperform rating and $160 target price, writing that Arm's (ARM) "premium valuation is justified" as the company is exposed to the "megatrend" of generative artificial intelligence.

What's more, Arm has an "unparalleled ecosystem" and "arguably the industry's best pricing power," he wrote.

Pajjuri is impressed with Arm's recent licensing performance, which he owes in part to the stepped-up power and complexity requirements for AI workloads.

"While Arm has always been a low-power leader, time to market is becoming even more important due to the rapid adoption of AI across end markets," he wrote. Pajjuri thinks Arm is exposed to favorable AI dynamics in a number of ways, including through the iPhone 16 launch and the boom of AI data centers.

Read: More good news for Apple? iPhone 16 Pro deals look slightly better this year

He wrote of a "good possibility that ARM will eventually offer data center AI accelerator [intellectual property]," something that could give a major boost to the company's serviceable addressable market.

Arm is calling for licensing revenue growth in the low- to mid-20% range during fiscal 2025, though management expects that to slow over time to a mid-single-digit rate of expansion. Pajjuri thinks that might be too conservative a view.

"We won't be surprised if the double-digit trend continues as rapid AI adoption necessitates faster processing power, faster time to market, and higher levels of customization," he wrote.

Pajjuri also thinks Arm could benefit as the personal-computer market rebounds. "Arm's PC market share has declined over the past few quarters amid a downturn in Mac shipments and stronger AMD/Intel sales," he wrote, but Mac sales are getting better and AI PCs could "catalyze Windows on ARM (WoA) adoption."

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Arm shares are up 2.2% in morning trading Friday. While the stock had more than doubled over the course of 2024, through Thursday's close, it's down 25% from its July highs.

-Emily Bary

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09-13-24 0943ET

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