The Nasdaq Composite tumbled 5% from its record high in the past week as investors were hit with worrisome economic data, including the worst consumer sentiment reading in 15 months. However, certain Wall Street analysts still think monster gains are possible in the next year for Arm Holdings (ARM +3.49%) and Axon Enterprise (AXON 5.21%).
- Lee Simpson at Morgan Stanley has set Arm with a bull-case target price of $300 per share. That implies 120% upside from its current share price of $136.
- Meta Marshall at Morgan Stanley has set Axon with a bull-case target price of $1,150 per share. That implies 135% upside from its current share price of $488.
Here's what investors should know about these artificial intelligence (AI) stocks.
NASDAQ: ARM
Key Data Points
Arm Holdings: 120% implied upside
Arm is a semiconductor company that, until recently, didn't sell chips. Instead, Arm primarily designs central processing unit (CPU) architectures and licenses the intellectual property (IP) to clients that design custom chips and systems. Arm also provides software-development tools that help programmers build applications for multiple end markets, from data centers to mobile devices.
The company's processors are more power efficient than x86 chips from Intel and AMD. Consequently, Arm processors are found in 99% of smartphones and 67% of other mobile devices. But the company is also gaining share in data centers due to recent improvements in chip performance. Alphabet, Amazon, Microsoft, and Oracle have developed custom CPUs based on Arm architecture.
Arm's financial results beat expectations in the third quarter of fiscal 2025, which ended in December 2024. Revenue increased 19% to $983 million on particularly strong growth in royalty fees, which are based on the number of shipped products that contain Arm IP. Meanwhile, non-GAAP net income increased 26% to $0.39 per diluted share.
On the earnings call, CEO Rene Haas discussed Arm's position in the artificial intelligence market: "We strongly believe that the advances in AI, both for training and inference, are going to increase the demand for compute in the AI cloud. We expect Arm solutions to address the needs from the cloud to the edge." He also said Arm will be the CPUs of choice for the Stargate Project, which plans to invest up to $500 billion in AI infrastructure in the U.S.
Wall Street estimates Arm's adjusted earnings will increase by 32% annually through fiscal 2026, which ends in March 2026. That makes the current valuation of 96 times adjusted earnings look expensive -- but not absurd. From that starting point, I doubt Arm stock will return 120% in the next year, but prospective investors can consider buying a small position.
NASDAQ: AXON
Key Data Points
Axon Enterprise: 135% implied upside
Axon specializes in public safety. The company is best known for its conducted energy weapons sold under the brand name Taser but also provides an ecosystem of sensors and software to law enforcement and government agencies. Beyond dominance in conducted energy weapons, Axon is also the market leader in body cameras and digital evidence management software.
The company is using artificial intelligence across its products. For instance, its digital evidence management software leans on AI to transcribe and redact audio and video. And Axon Fleet cameras use AI to read license plates across multiple lanes of traffic and instantly alert law enforcement when a match on an agency hotlist is identified.
Last April, Axon launched Draft One, a generative AI application that uses body-camera footage to automate report writing for law enforcement. Following its launch, Draft One reached a $100-million revenue pipeline faster than any product in the company's history. CEO Rick Smith said, "We are positioning ourselves as the indisputable leader in delivering the power of AI in practical, usable applications."
Last week, Keith Housum at Northcoast Research downgraded Axon to hold on concerns about its valuation and its breakup with Flock Safety, a former partner that provided real-time crime-center technology. However, Meta Marshall at Morgan Stanley thinks the market overreacted to the news. "Given Axon was the one to terminate the relationship, we view it as more than likely that they have a workaround on the real-time video technology," he wrote.
Axon shares have tumbled 32% since being downgraded, but that creates a compelling buying opportunity. Wall Street expects the company's adjusted earnings to increase at 22% annually through 2025. Admittedly, the current valuation of 99 time adjusted earnings still looks expensive, versus that consensus, but Wall Street has consistently underestimated the company.
Axon's earnings beat the consensus estimate by an average of 34% (as measured in dollars) over the last six quarters. If that trend continues, the current valuation would be quite reasonable. I doubt Axon shareholders will see triple-digit returns in the next year, but investors comfortable with volatility can consider buying a small position.
