On Thursday, Needham maintained its Hold rating on shares of Arm Holdings (NASDAQ: NASDAQ:ARM), following the company's latest financial update. Despite reporting better-than-expected results and raising short-term projections, Arm Holdings has decided to keep its full-year outlook unchanged for the second quarter in a row.
The technology firm adjusted its growth forecast for this year's royalty revenue, reducing the expected increase from over 20% to the high teens on a year-over-year basis. This revision reflects the ongoing challenges in the industrial and Internet of Things (IoT) sectors. However, Arm Holdings anticipates higher licensing revenue for the rest of the year, which could help mitigate the impact of the slower royalty revenue growth.
Needham's analysis suggests that while there could be potential downside risks to the consensus estimates for the fiscal year ending in 2026 (FYE26), their more conservative projections might still be achievable if the company's licensing revenue continues to perform strongly.
Nevertheless, the firm pointed out that the current stock price, which implies high expectations, might face pressure due to the absence of an improved outlook for the fiscal year ending in 2025 (FYE25) and the potential downside for FYE26.
Arm Holdings' latest financial disclosures have led Needham to reaffirm its Hold stance on the company's stock, signaling a cautious approach in light of the revised revenue growth projections and the potential implications for future earnings.
In other recent news, Arm Holdings reported a 39% year-on-year revenue growth, primarily driven by licensing and royalty revenue from AI applications and smartphone segments. The company maintains its revenue guidance for the fiscal year between $3.8 billion and $4.1 billion. Morgan Stanley (NYSE:MS) maintained an Overweight rating on Arm Holdings, emphasizing strong underlying growth due to increased adoption of the v9 architecture in the coming quarters.
In an unexpected move, Arm Holdings announced a new multi-year licensing agreement with its parent company, SoftBank (TYO:9984), contributing approximately $43 million in licensing revenue for the quarter. Analyst firm Evercore ISI has increased its price target for Arm Holdings to $176, citing the transition to the new V9 architecture and the initiation of Compute Subsystem Services (CSS) as key revenue growth drivers.
Meanwhile, Deutsche Bank (ETR:DBKGn) has raised the price target for Arm Holdings to $125, while maintaining a Hold rating. Barclays (LON:BARC) also increased the price target to $145, keeping an Overweight rating on the stock. In contrast, Bernstein SocGen Group downgraded the stock rating to Underperform due to concerns about revenue prospects outside of the AI segment.
Despite an intensifying legal dispute with Qualcomm (NASDAQ:QCOM), Citi has sustained its Buy rating on Arm stock. Arm has also announced the appointment of industry veteran Young Sohn to its board of directors. These are recent developments that provide investors with a clearer picture of the company's current position.
InvestingPro Insights
Arm Holdings' financial performance and market position offer a nuanced picture that complements Needham's Hold rating. According to InvestingPro data, ARM's revenue growth remains robust, with a 31.37% increase over the last twelve months and an impressive 39.11% quarterly growth in Q1 2025. This aligns with the company's anticipation of higher licensing revenue, potentially offsetting the slower royalty revenue growth.
InvestingPro Tips highlight that ARM is trading at high valuation multiples across various metrics, including earnings, EBIT, EBITDA, and revenue. This corroborates Needham's observation about the stock price implying high expectations. Moreover, ARM's strong return over the last year, with a 161.77% price total return, underscores the market's optimism about the company's prospects.
However, investors should note that ARM operates with a moderate level of debt and its liquid assets exceed short-term obligations, suggesting financial stability despite the high valuations. For those seeking a more comprehensive analysis, InvestingPro offers 14 additional tips for ARM, providing deeper insights into the company's financial health and market position.
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