Stock of Arm Explodes 50% Higher as Company Proves It is an Early Winner in Artificial Intelligence

Arm Holdings PLC's business model showcased a commendable aspect in the latest quarter, propelling the company's stock to soar by approximately 50% in Thursday morning trading. Analysts are increasingly optimistic about the company's future, particularly focusing on the robust performance of its royalty revenue.

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Guggenheim analyst John DiFucci emphasized the significance of Arm's royalty revenue, which he deemed as the primary driver of profit. In the latest quarter, this segment exhibited an 11% revenue growth, reaching $470 million and surpassing expectations. DiFucci underscored the exceptional nature of royalties in Arm's financial model, citing margins that are unparalleled in other legal endeavors. He emphasized that royalties are likely to propel future free cash flow and ultimately dictate the stock's valuation.

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While royalty revenue took the spotlight, DiFucci urged attention to the licensing segment of Arm's business as well. He noted that today's licenses are instrumental in driving tomorrow's royalties. Despite facing challenging comparisons, license revenue experienced an 18% increase, with expectations of substantial growth in the current quarter. DiFucci positioned Arm at the forefront of the artificial intelligence (AI) landscape, distinguishing it from other companies that claim AI success without tangible financial proof.

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DiFucci assigned a buy rating to the stock and raised his target price to $93 from $74.

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TD Cowen analyst Matthew Ramsay highlighted Arm's strides with its latest-generation ARMv9 architecture, which is becoming a more significant contributor to royalty revenue. The unexpectedly doubled royalties for similar-tier chips, driven by ARMv9, make it more feasible for the company to meet or surpass financial estimates discussed at the IPO. Ramsay also noted the increasing prominence of "all-you-can-eat" subscription licenses from key customers, expecting this to enhance visibility in licensing revenue over time.

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Ramsay maintained an outperform rating on the stock and increased his price target to $95 from $80.

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Rosenblatt's Hans Mosesmann identified AI and the ARMv9 architecture as the twin engines driving Arm's success. Strong calendar-year visibility is anticipated due to a further shift towards the ARMv9 mix and broader share gains beyond the mobile sector. Mosesmann highlighted Arm as a primary beneficiary of the secular AI trend, emphasizing the shift of inference workloads to the edge from the current cloud-centric concentration.

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Mosesmann retained a buy rating and raised his price target to $140 from $110, recognizing the pivotal role of Arm Holdings PLC in the evolving AI landscape and its technological advancements.

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