Arm Holdings Already Has 40% Upside

Key Points

• The year’s biggest IPO has given investors plenty to chew on. 
• Shares have been under pressure this month, but the outlook is bullish. 
• The risk/reward profile is also bright and supports the long side. 

With just over 20 days of public trading under their belt, Arm Holdings plc - ADR NASDAQ: ARM shares have already been on a rollercoaster. As the biggest IPO of the year, there were plenty of eyes watching when they floated last month, and expectations were high. 

Arm is one of the brightest stars of the British tech scene and the UK’s only real chip maker of any significance. Their chips are used across a range of devices, including most of the world’s smartphones, and compete against the likes of NVIDIA Corp NASDAQ: NVDA. In fact, for a while last year, there were talks of the latter acquiring Arm, so for them to make it to the public market on their own eventually is a bold statement. 

It remains to be seen, however, if Arm can also deliver the eye-watering gains that NVIDIA has been giving to shareholders in recent months. 

First Few Days

In a hark back to the golden days of tech IPOs, Arm’s shares did deliver on the hype in their first few days of trading, jumping 35% from their IPO price of $51. But the honeymoon period ended pretty quickly, and they’re less than a dollar away from dropping below their IPO price after a 25% fall. 

To be fair, equities, in general, traded down at the end of September, so you could say it’s been a case of unfortunate timing for Arm, who got caught up in the slide. But with both the broader market, as seen with the benchmark S&P 500 index, and chip stocks in general starting to turn north again in the past week, it’s a good time to see what the outlook is like for Arm shares heading into the rest of the year. 

One of the most bullish calls out there is from the team at J.P. Morgan, who initiated their coverage of Arm earlier this week with a $70 price target. From where shares were due to open on Friday, this points to an upside of around 40%, not bad for a freshly floated company that’s still finding its feet. 

Strong Profile

Analyst Harlan Sur is a big fan of how embedded Arm chips already are with the likes of Apple Inc’s NASDAQ: AAPL and Alphabet Inc’s NASDAQ: GOOGL smartphones, while at the same time, the company is driving for further diversification with broader computer, networking and memory products. Sur is looking for at least 18% revenue growth over the next three years and expects the company to strengthen its foothold in multiple industries, such as auto, IOT, and data centers, along the way. 

Bank of America echoed this with their Buy rating on Arm shares and shared a compound annual growth rate target of 43% through 2025. This would be a full 1.5x what its chipmaking peers are targeting but is more than doable given Arm commands higher royalty rates and strong relationships with the big customers. 

Getting Involved

Against these bullish calls, there has been some caution urged, with the likes of Susquehanna rating them a Neutral and Bernstein going all the way to an Underperform rating. A key concern, shared by both, revolves around how much of the company’s revenue, 25% last year, comes from the Chinese market and how this might be adversely affected by any escalation in geopolitical tensions there.

But this is something all the chip makers are dealing with to some extent or another, and it’s hard to argue that the risk/reward setup isn’t attractive right now. Yesterday, Arm shares found themselves back by their IPO level for the tenth time since IPO’ing. 

On each previous occasion, there have been plenty of buyers who stepped in, and short of a broader market sell-off, you’d expect the same this time. If the bears are unable to take shares below $51 in the coming sessions definitively, momentum should swing hard to the upside. NVIDIA shares are currently rallying hard towards fresh all-time highs, which bodes well for other chipmakers, so it’s fair to expect Arm to follow shortly in their slipstream.