Arm's Stock Just Received a New Bullish Prediction Despite Doubling This Year

Despite Arm Holdings PLC shares doubling in value this year, they still appear appealing to Raymond James analyst Srini Pajjuri. He initiated coverage of the chip design company's stock with an outperform rating and set a target price of $160, asserting that Arm’s premium valuation is justified due to its exposure to the rising trend of generative artificial intelligence (AI).

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Pajjuri believes Arm has a unique position in the industry, citing its “unparalleled ecosystem” and strong pricing power, which he considers to be among the best in the semiconductor space. He attributes Arm's recent strong performance in licensing to the growing demands for processing power and complexity in AI workloads, further boosting its potential.

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Historically, Arm has been recognized as a leader in low-power consumption, but the rapid growth and integration of AI technologies across various markets have made speed-to-market even more crucial, according to Pajjuri. He believes Arm is well-positioned to take advantage of these AI-related trends in multiple ways. One significant area of opportunity he highlights is Arm's role in the upcoming iPhone 16 launch, as well as its involvement in AI data centers, which are expected to expand rapidly in the near future.

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One of the most notable insights Pajjuri offers is the possibility that Arm may eventually enter the AI data center space by offering intellectual property (IP) for AI accelerators. This development, if it materializes, could significantly broaden the company's serviceable addressable market (SAM) and solidify its place as a critical player in the AI-driven computing sector.

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Arm has set expectations for licensing revenue growth in the low- to mid-20% range for fiscal 2025. However, management has also projected that this growth rate may slow over time, eventually stabilizing to a mid-single-digit percentage. Pajjuri, however, is more optimistic than the company’s management on this front. He suggests that Arm’s projections may be too conservative, and he wouldn’t be surprised if double-digit growth continues, especially as the demand for faster processing power and customization intensifies alongside the rapid adoption of AI.

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Pajjuri also sees potential for Arm in the personal computer (PC) market. Although Arm’s market share in PCs has declined in recent quarters, primarily due to a slump in Mac shipments and increased competition from AMD and Intel, there are signs of a rebound. With Mac sales improving, and the potential emergence of AI-powered PCs, Pajjuri believes that this could act as a catalyst for increased adoption of Windows on Arm (WoA) devices. This development would further enhance Arm's presence in the PC market, potentially reversing the downward trend of the past few quarters.

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In line with this positive outlook, Arm’s stock was up 2.2% in morning trading on Friday. The stock had more than doubled in value during 2024, but it still remains down 25% from its peak in July. Despite this pullback, Pajjuri’s confidence in Arm’s long-term prospects remains strong, particularly given the company’s involvement in several high-growth sectors, including AI and data centers.

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Pajjuri's bullish stance on Arm is largely driven by the ongoing AI revolution. Generative AI is one of the most transformative technological trends in recent years, and Arm is well-positioned to capitalize on this shift. The increasing power and complexity required for AI applications are driving demand for more advanced and efficient semiconductor designs, and Arm is at the forefront of meeting these needs.

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Moreover, Pajjuri highlights the strategic importance of Arm’s ecosystem, which extends across multiple industries and applications. From smartphones to data centers, Arm’s designs are used in a wide range of devices, giving the company a broad base from which to grow. The upcoming launch of the iPhone 16 is just one example of how Arm’s technology is embedded in products that are critical to the tech industry’s growth.

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The potential for Arm to enter the AI data center market with new IP for AI accelerators is particularly exciting for investors. Data centers are the backbone of the digital economy, and with the explosion of AI workloads, there is an increasing need for specialized hardware that can handle the computational demands of these applications. If Arm successfully expands into this space, it could unlock significant new revenue streams and cement its position as a leader in the AI and semiconductor industries.

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While there are some concerns about the slowing growth rate of Arm’s licensing revenue, Pajjuri’s optimism is grounded in the belief that the continued rise of AI will necessitate faster processing and higher levels of customization. This, in turn, could sustain strong growth for Arm in the years to come, even as the broader market for semiconductors becomes more competitive.

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In summary, Pajjuri’s outlook on Arm remains highly positive despite the stock’s recent decline from its July highs. He believes that Arm’s exposure to AI, its strong licensing performance, and its potential entry into new markets like AI data centers all make it a compelling investment opportunity. His $160 target price reflects this confidence in the company’s ability to navigate the challenges and opportunities ahead.

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