Arm Holdings
had a spectacular return to the public market. The stock priced at the high end of the expected range of $47 to $51, opened 10% higher on Thursday at $56.10 and closed at $63.59, for a first day gain of nearly 25%.
That gives the company a valuation of $68 billion, more than 25 times the company’s revenues for the March 2023 fiscal year.
The way Needham analyst Charles Shi sees it, Arm’s valuation is simply too high.
Shi launched coverage of the stock on Thursday afternoon with a Hold rating, and without a price target. His view is that while Arm (ticker: ARM) has completely dominated the smartphone market—almost every handset includes a chip with an Arm-based design—he thinks growth gets tougher from here.
“Arm’s architecture is a foundation of smartphones, but we believe the world is entering a post-smartphone era that will see high-performance computing and IoT lead the next phase of semiconductor growth,” Shi writes in a research note.
Shi’s view is that Arm’s historic success in securing slots in smartphones reflects “a tightly controlled ecosystem.” But he adds that in new growth areas, “not only do viable alternatives to Arm exist, but ecosystem control often resides in the hands of others.”
Shi thinks Arm can grow by capturing more value from smartphones—there’s no market share left to take—but contends there isn’t enough potential to support upside from the stock’s IPO valuation. “We…await a better entry point,” he writes.
“Just like Intel finds it difficult to replicate its success outside of PCs, we think Arm will face challenges outside of smartphones at the time when high-performance computing is replacing smartphones as the growth driver of the semiconductor industry,” he writes.
Shi says that the company’s “mixed financial performance” between 2016 and 2021 reflects challenges Arm has faced monetizing its internet of things business to the same degree as smartphones. He notes that IoT remains under 10% of royalty revenue, despite accounting for 70% or more of the total number of Arm-based parts shipped.
The analyst adds that the next phase of chip growth will be driven by generative AI applications in the data center. He notes that the data center ecosystems are “firmly” in the hands of
Nvidia
when it comes to graphics processors, or GPUs, while Intel and AMD still dominate in the market for CPUs, or central processing units. And he notes that the open source RISC-V standard is narrowing the gap with Arm for non-smartphone applications on performance, power consumption and total cost of ownership. “How Arm will overcome the ecosystem challenges and outcompete RISC-V is unclear to us,” he writes.
Write to Eric J. Savitz at [email protected]
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