Arm, the British semiconductor design company, has seen its share price skyrocket since reporting third-quarter earnings in February. The stock is up 65% this year, driven by what Morningstar calls an “AI buzzword” narrative and the company’s ability to raise royalty fees following the launch of its latest chip architecture. The arm develops and designs blueprints for microprocessors and counts companies like Nvidia and Apple among its biggest customers. The company’s business model relies on licensing revenue – or royalties – for each chip its customers manufacture using its designs. However, Morningstar believes the current share price is too high and could fall 54% to $57. ARM YTD Mountain “After the company reported earnings on February 7, its shares surged more than 50% and have since traded around $140, an exaggerated artificial intelligence. Coupled with the narrative, the recent rise in royalty rates has been driven by enthusiasm for the latest architecture, Armv9,” Morningstar analyst Javier Corionero said in a March 28 note to clients. . AI is ‘strong’ for Arm While acknowledging that Arm is doing well and benefiting from advances in artificial intelligence, Morningstar said the company’s AI story is “underwhelming” compared to Nvidia’s. , which is a major beneficiary of AI chip sales. The research firm doesn’t expect Arm to experience revenue growth “anywhere close to Nvidia.” Morningstar’s price target for Arm, which the firm calls a fair value estimate, is $57 per share. It assumes a 17% annual growth rate over the next decade and a peak profit margin of 44%. In contrast, the research firm believes the current share price reflects a 22% revenue growth rate and a 55% operating profit margin. While this scenario would provide a short-term boost to Arm’s finances, it would pose long-term risks for the company to quadruple its royalty rate in just eight years, a Morningstar analyst said. Which will likely force consumers to look for alternatives and cheaper ones. Architecture Morningstar is not alone in its bearish view. The consensus price target of 31 analysts polled by FactSet points to a 14% decline. Arm declined to comment when contacted by CNBC Pro. In contrast, Mizuho Securities has a more optimistic view of the arm’s long-term prospects. The research firm raised its price target for Arm to $160, which represents a 28% upside from current levels. The investment bank believes Arm’s revenue will grow 25% annually for the three years to 2025, significantly higher than Morningstar and the consensus. Mizuho Securities highlighted several reasons for its bullish stance on Arm. Mizuho analysts led by Vijay Rakesh said in a note, “ARM is the undisputed leader in the mobile CPU space with 99% market share, and we see the potential for further revenue ramp as more OEMs v9 plate over the next 3 years. will be transferred to the farms.” March 6 for customers.
