Arm Holdings PLC (NASDAQ: ARM) is emerging as a formidable contender in the server chip market, with the potential to disrupt the dominance of Intel and Advanced Micro Devices (AMD).
According to Atul Goyal, Managing Director at Jefferies Asia, Arm’s power-efficient CPUs position the Cambridge-based company to gain significant market share in servers, a critical component for large-scale data centers.
In an interview with CNBC, Goyal emphasized that Arm’s architecture could potentially replace x86 chips in most servers, marking a significant shift in the industry.
Arm stock may still not be worth owning
Despite this promising outlook, the valuation of Arm’s stock remains a contentious issue.
Although the company has experienced a remarkable 50% increase in stock price since the start of 2024, Goyal expresses caution.
He acknowledges that while Arm is well-positioned for growth over the next five to ten years, the rapid rally of its shares over the past seven months has led to concerns about overvaluation.
Goyal is particularly wary of the high expectations baked into the current stock price, suggesting that it might not be the best time to invest, even though the company’s fundamentals remain strong.
Goyal also highlighted the ongoing impact of artificial intelligence (AI) on the industry, asserting that AI is far from a passing trend.
He believes that Intel’s struggles in the AI space could serve as a significant tailwind for Arm, further strengthening its position in the market.
However, despite these positive indicators, Goyal remains cautious about the stock, stating that he is “not a big believer yet” in its current valuation.
This skepticism was echoed by our market analyst Crispus Nyaga, who recently suggested that Arm’s shares could see a downside to $85.
Nyaga’s analysis underscores the risks associated with Arm’s current valuation, despite the company’s strong market positioning.
Arm issued muted Q2 guidance last month
Adding to the concerns, Arm issued muted guidance for its second quarter last month.
While the company exceeded Street estimates for fiscal Q1, it projected revenue of $780 million to $830 million for Q2, with adjusted EPS between 23 cents and 27 cents.
This forecast was slightly below analysts’ expectations of $804 million in revenue and 27 cents in earnings per share, contributing to a more than 40% decline in Arm’s stock over the past month.
Further complicating the outlook, Arm has stopped disclosing the number of Arm-based chips shipped, a move explained by CEO Rene Haas as a shift in focus towards higher-value, lower-volume markets such as data centers, AI accelerators, and smartphone application processors.
This strategic pivot suggests that Arm is aligning itself with emerging growth areas, but it also raises questions about the company’s performance metrics and long-term prospects.
While Arm Holdings appears to be in a strong position to challenge industry giants like Intel and AMD, particularly in the growing server market, its stock may not be as attractive due to valuation concerns and recent performance issues.
Investors should weigh the company’s long-term potential against the risks associated with its current share price.
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