Up 96% YTD, Here's Why One Analyst Says Arm Holding Can Keep Rising

British chip designer Arm Holdings plc (ARM) has been one of the major beneficiaries of the artificial intelligence (AI) wave. In its public trading debut last September, its shares surged an impressive 25% on day one. The company has made rapid strides in the AI landscape, with industry giants such as Advanced Micro Devices (AMD), Apple (AAPL), Broadcom (AVGO), Nvidia (NVDA), Qualcomm (QCOM), and many others relying on its innovative chip designs.

Last month, at the Computex 2024 event, Arm made headlines with its bold forecast of reaching 100 billion AI-ready devices by the end of next year. Adding to its positive buzz, the company was swiftly included in the Nasdaq-100 Index ($IUXX) just 10 months after its IPO, highlighting its rapidly growing impact on the global tech scene. 

While Arm has enjoyed massive investor attention this year, with the shares up more than 90% YTD, can the stock maintain this impressive rally? At least one analyst thinks it can. So, let’s explore the reasons behind this optimistic outlook.

About Arm Holdings Stock

With over 30 years of pioneering power-efficient CPU design, Cambridge, UK-based Arm Holdings plc (ARM) has evolved from its origins as a battery-focused computer designer to become a leader in ultra-efficient compute platforms. Today, Arm's technology drives the next generation of smart, AI-powered, and immersive experiences across everything from sensors and smartphones to automobiles and data centers. 

The company is at the forefront of computing innovation, providing high-performance, cost-effective, and energy-efficient IP solutions for CPUs, GPUs, NPUs, and interconnect technologies. Valued at a strong market cap of around $156.3 billion, the stock hit an all-time high of $188.75 earlier this month, fueled by the sizzling buzz surrounding its AI innovations. 

While the stock has pulled back since then, in 2024, the company has staged a remarkable performance. ARM shares are up more than 96%, dwarfing the broader S&P 500 Index’s ($SPX) gain of 13.2% and the Nasdaq-100’s 12.7% return on a YTD basis. Over the past six months alone, the stock is up 106%. 

Considering the massive investor attention the chip design company has garnered so far this year, ARM stock is not exactly a bargain. Trading at 192.41 times forward earnings, the stock is priced well above its industry peers. Yet, despite concerns over valuation, the growth trajectory for ARM stock remains highly enticing.

Arm's Q4 Earnings Beat the Street

Despite reporting better-than-expected fiscal Q4 earnings results after the close on May 8, Arm shares tumbled 2.3% in the subsequent trading session. 

Arm's total revenue soared to $928 million, marking a remarkable 46.6% year-over-year increase, and exceeding estimates by a 5.7% margin. Adding to the impressive performance, the company's adjusted EPS of $0.36 also marked a significant improvement from the prior-year quarter, and surpassed projections by a notable 17.7% margin.

During the quarter, Arm’s licensing revenue jumped an impressive 60% year-over-year to $414 million, fueled by lucrative new agreements and soaring demand for its energy-efficient AI technology in data processing. At the same time, royalty revenue surged 37% annually to $514 million, driven by the growing adoption of its recently introduced high-margin Armv9-based chips.

However, Arm’s fiscal 2025 guidance fell short of analysts’ estimates, which was the primary reason for the post-earnings pullback.

For fiscal 2025, the company anticipates revenue to range between $3.8 billion and $4.1 billion, while adjusted EPS is expected to be between $1.45 and $1.65. However, the lower end of the company’s annual revenue forecast missed Wall Street's expectations, which called for revenue of $3.99 billion. 

The company is expected to report its fiscal 2025 Q1 earnings results this Wednesday, July 31. 

What Do Analysts Expect For Arm Holdings Stock?

On July 19, Morgan Stanley (MS) upgraded its rating on Arm from “Equal-Weight” to “Overweight,” and raised its price target to $190 - marking a new Street-high price target for the stock. 

The investment bank expects that even after Arm’s strong YTD rally, this growth trend will persist as AI technology increasingly transitions to edge computing, becoming embedded in consumer devices and various applications. As a result, the investment firm sees the company’s serviceable addressable market surpassing $14 billion by 2027. 

Morgan Stanley’s bullish outlook hinges on several other factors, such as Arm’s growing market presence, as evidenced by its impressive client roster. Furthermore, despite a dip in investor confidence in May when Arm's guidance for the year fell short of expectations, Morgan Stanley believes this was a strategic understatement, positioning the company to deliver better-than-expected results. 

Additionally, reports suggest an increase in Apple’s iPhone shipments could positively impact Arm’s performance. Morgan Stanley also points out that the market has somewhat overlooked the upcoming deployment of Arm’s Compute Subsystems, which is expected to roll out from 2025 onwards. 

"All told we think these developing edge AI opportunities have explained some of the share price movement year to date, but our assessment of the true [serviceable addressable market] of each, along with the likelihood of Arm capturing more functionality on the CPU, we think there is more upside in the Arm story," Morgan Stanley analysts wrote.

Overall, ARM stock has a consensus “Moderate Buy” rating. Out of the 23 analysts covering the stock, 14 suggest a “Strong Buy,” eight recommend a “Hold,” and the remaining one gives a “Strong Sell” rating.

The stock currently trades well above its average analyst price target of $127.90. However, Morgan Stanley’s newly raised target of $190 suggests that ARM stock could rally as much as 29.5% from here.