Bernstein analysts initiated Arm Holdings (NASDAQ:ARM) shares at Underperform with a $46 price target in a note Monday.
They told investors that while the expectations Arm will be a beneficiary from AI growth may be adding a premium to the share price, they believe it is too soon to declare the company an AI winner.
"In addition, we remain more conservative on their ability to deliver increased royalty rates at the pace management is guiding," said the analysts. "Indications are that Arm expects to see significant royalty rate improvement in mobile over the next 3-4 years aligned to customers moving from v8 to v9 of their architecture; We maintain more conservative estimates, reaching just under 4% in mobile by FY27 (vs. guidance of closer to 5%)."
"We estimate 13% top line CAGR through FY27, although remain cautious in FY24 at 8% growth (vs. management guidance of 11%)," they added. "R&D remains the critical lever for Arm's profitability; we factor in LSD growth (vs. flat guidance) as we maintain this is a key driver for growth longer-term."
Bernstein believes two of the biggest risks to the Arm growth story for the next two to three years are competition from RISC-V and the company's distance from the China business, which was ~25% of its revenues last year.