The Nasdaq Composite (^IXIC +1.52%) has spent much of March more than 10% off its all-time high, which put the index in correction territory. But Wall Street analysts see that drawdown an opportunity to buy shares of Arm Holdings (ARM +2.71%) and Upstart Holdings (UPST +4.32%).
- Arm is down 33% from its 2024 high due in part to disappointing guidance in the recent quarter. But among the 41 analysts that follow the company, the median target price is $177.50 per share. That implies 42% upside from its current share price around $125.
- Upstart is down 86% from its 2021 high because high inflation and interest rates have made the lending environment less favorable in recent years. But among the 17 analysts that follow the company, the median target is $86.50 per share. That implies 57% upside from its current share price around $55.
Here's what investors should know about Arm and Upstart.
NASDAQ: ARM
Key Data Points
Arm: 42% upside implied by the median target price
Arm designs CPUs and subsystems that let clients develop custom chips for end markets like mobile devices and data centers. Arm does not sell chips directly (at least not yet), but rather licenses intellectual property to other companies. Arm also provides software development tools that help engineers write and debug applications on its processors.
Every CPU has an architecture, an instruction set that defines how the hardware interacts with software. Arm architectures have traditionally been associated with power efficiency, while x86 architectures from Intel and AMD have traditionally been associated with compute performance. Consequently, Arm chips are the logical choice in battery-powered devices. It has more than 99% market share in smartphones and 67% market share in other mobile devices.
Likewise, Intel and AMD chips have long been the industry standard in personal computers and data center servers. But Arm is gaining market share in those categories because of performance improvements and the flexibility its business model affords customers. Apple has transitioned its MacBooks to Arm chips, and the three largest public clouds -- Amazon, Microsoft, and Alphabet -- have designed Arm-based data center processors for artificial intelligence and general purpose workloads.
Arm gave a strong performance in the third quarter fiscal 2025, which ended in December 2024. Revenue increased 19% to $983 million as AI drove demand for more energy efficient computing platforms, and non-GAAP net income increased 26% to $0.39 per diluted share. But shares declined following the report because Arm narrowed its full-year guidance, such that revenue and net income are forecast to increase 23% and 26%, respectively.
Wall Street estimates Arm's adjusted earnings will increase at 31% annually through fiscal 2026, which ends in March 2026. That makes the current valuation around 85 times adjusted earnings look somewhat expensive. So, I am skeptical about the stock advancing 42% in the next year, but patient investors can consider buying a small position today.
NASDAQ: UPST
Key Data Points
Upstart: 57% upside implied by the median target price
Upstart uses AI to make lending more profitable. Over 100 banks and credit unions use its platform to provide consumer credit products, including personal and automotive loans, refinancing, and home equity lines of credit. Whereas most lenders make credit decisions with simple rules-based systems that consider a small number of variables, Upstart's machine learning models consider thousands of variables.
Consequently, the company says its credit decisioning technology is more accurate than traditional lending models. Banks using its platform can not only approve more applicants, but also offer lower interest rates to those borrowers. Additionally, most loans originated on its platform are fully automated, which improves operational efficiency for the lender.
Upstart reported fourth-quarter financial results that beat estimates on the top and bottom lines. Revenue increased 56% to $219 million as loan origination volume soared, and non-GAAP net income improved to $0.29 per diluted share, up from a loss of $0.11 per diluted share in the same period last year. The company anticipates 56% revenue growth in 2025.
Upstart estimates its total addressable market at more than $2 trillion in loan originations. But transaction volume on its AI-powered lending platform was less than $6 billion in 2024, which means the company has hardly scratched the surface of its market opportunity.
With that in mind, the stock currently trades at 7.8 times sales, a discount to the historical average of 9 times sales. That price is not exactly cheap, but investors with a time horizon of at least three years should consider buying a small position today. I am skeptical about Upstart returning 57% in the next year, though it could happen under the right conditions.
As a caveat, Upstart is very sensitive to the macroeconomic climate. Banks usually charge higher interest rates as inflation increases, which diminishes consumer demand for credit. Therefore, any reacceleration in inflation would likely be bad news for Upstart, at least temporarily. Indeed, the stock is currently 86% below its high, and it was rising inflation and interest rates post-COVID that sent shares falling in the first place.
