Arm Holdings experienced a spectacular return to the public market, with its stock pricing at the high end of expectations and opening 10% higher. The company closed its first day of trading with a remarkable gain of nearly 25%, garnering a valuation of $68 billion. However, according to Needham analyst Charles Shi, Arm’s valuation may be too high.
In his coverage of Arm, Shi expresses a cautious stance, assigning a Hold rating without a specific price target. While Arm has undeniably dominated the smartphone market with its widely-used chip designs, Shi believes that future growth may face challenges.
Shi suggests that we are entering a post-smartphone era, where high-performance computing and the Internet of Things (IoT) will drive semiconductor growth. He notes that while Arm’s architecture has been the foundation of smartphones, it might not enjoy the same level of control in these emerging areas. Viable alternatives to Arm exist, and ecosystem control often rests in the hands of other players.
Although Shi believes that Arm can still derive more value from smartphones, he questions whether this alone can support the stock’s IPO valuation. Given this perspective, he awaits a better entry point for potential investors.
In conclusion, while Arm Holdings has undoubtedly achieved great success in the smartphone market, analysts like Shi are raising valid concerns about the company’s long-term growth prospects. As we venture into new technological frontiers, the landscape is evolving, presenting both challenges and opportunities for Arm Holdings to navigate.
Arm Faces Challenges Outside of Smartphones, says Analyst
In a recent analysis, analyst Ming-Chi Shi raises concerns about Arm’s ability to replicate its success beyond the smartphone market. Shi suggests that as high-performance computing takes over as the growth driver of the semiconductor industry, Arm will encounter obstacles in diversifying its reach.
Highlighting Arm’s “mixed financial performance” from 2016 to 2021, Shi points out the challenges the company has faced in monetizing its internet of things (IoT) business compared to smartphones. Despite IoT accounting for over 70% of Arm-based parts shipped, it contributes less than 10% to royalty revenue.
Shi identifies generative artificial intelligence (AI) applications in data centers as the next phase of chip growth. In this area, Nvidia dominates the graphics processing unit (GPU) market, while Intel and AMD continue to lead in central processing units (CPUs). Moreover, the emergence of the open-source RISC-V standard poses a threat to Arm’s non-smartphone applications in terms of performance, power consumption, and overall cost. Shi highlights the unclear path for Arm to overcome these ecosystem challenges and outcompete RISC-V.
While Arm’s future prospects outside of smartphones may seem uncertain, the company will need to address these challenges head-on to maintain its position in the evolving semiconductor landscape.