Shares of Arm Holdings (ARM +6.47%) climbed sharply higher on Thursday, rising as much as 8.8%. As of 12:30 p.m. ET, the stock was still up 8.3%.
The catalyst that drove the semiconductor specialist higher was an upgrade and some bullish commentary from a Wall Street analyst.
NASDAQ: ARM
Key Data Points
Better days ahead
Daiwa Securities analyst Louis Miscioscia upgraded Arm Holdings to outperform (buy) from neutral (hold) while assigning a $130 price target. That represents potential gains for investors of 21% compared to Wednesday's closing price. The analyst cited the recent sell-off of artificial intelligence (AI) stocks and Arm's recent price movement, calling it "a few interesting and volatile quarters."
The analyst went on to say that his firm doesn't believe there will be a recession, suggesting that the Federal Reserve will soon begin to cut interest rates. This gives Arm a clear path higher in the coming months.
A significant opportunity
It's clear the analyst has done his homework. For its fiscal 2025 first quarter (ended June 30), Arm delivered robust results. Record revenue of $939 million jumped 39% year over year, driven by license revenue that surged 72% and royalty revenue that grew 17%.
Furthermore, the advent of generative AI represents a sizable opportunity for Arm. The company's latest processor, the Arm version 9 (V9), is a critical component in AI semiconductors. For example, Nvidia's cutting-edge GH200 Grace Hopper Superchip -- which combines accelerated CPU and GPU technology to process AI -- uses 144 Arm V9 CPU cores. These processors not only offer greater computer power -- boosting demand -- but also carry twice the royalty rate of the previous generation, which will boost Arm's returns.
Investors have expressed concerns about Arm's high valuation, and it's easy to see why. Arm was selling for 68 times forward earnings and 23 times sales when the market closed yesterday, which seems outrageous at first glance. However, this fails to take into account the company's current growth trajectory. The more appropriate metric is the forward price/earnings-to-growth (PEG) ratio, which clocks in at 0.16, when any number less than 1 is the standard for an undervalued stock.
That suggests that Arm stock is a buy.
