Raymond James Reinstates Semi Coverage, Calls ARM a Key AI Beneficiary

Arm Holdings plc (NASDAQ:ARM) is one of the AI Stocks in Focus on Wall Street. On November 20, Raymond James reinstated coverage on the semiconductor sector, citing significantly more upside for a number of semiconductor stocks including ARM.

“The AI secular theme has taken the wheel, and the strategy of trading the cycle in semis has moved to the back seat. Each of these companies is impressive in its own way.”

Particularly for ARM, the firm noted long-term potential in artificial intelligence but views strategic uncertainty and valuation headwinds ahead. It has a Market Perform rating on the stock with no price target.

“The company is transitioning as it gains ground in data centers, with opportunities catalyzed by AI. Arm licenses its semiconductor intellectual property to a broad base of fabless semi customers and also realizes ongoing revenue through the collection of royalties on the devices sold.”

The firm discussed how ARM is considering becoming a fabless semi supplier, enabling it to capture more of the value chain for ARM processors. While this could bring in bigger profits, the firm believes it also comes with risks and may lead to a reduced stock multiple.

Since SoftBank holds a 90% ownership, any shift that ARM decides upon will need to align with its strategy and philosophy.

The firm also noted how the company’s exposure to data center is growing, reaching an estimated 20% of sales including customers such as Amazon, Google, and Microsoft. Meanwhile, there is declining exposure to Arm China, Apple, and Samsung.

Moroever, Arm’s revenue streams is evolving and each segment now contributing to an estimated 50-50 split. However, management is now focusing on higher royalties from Neoverse and CSS.

“Royalties for CSS sales can be almost 2× higher than commoditized legacy chips, and adoption is accelerating as hyperscalers continue to invest in expanding AI capacity and building new clusters.”

Arm Holdings plc (NASDAQ:ARM) is a semiconductor and software design company that designs and manufactures semiconductor technology and other related products.

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