Arm Holdings PLC (NASDAQ:ARM)’s royalties are expected to flow thick and fast in the months and years ahead as the British microchip megacap reaps the benefits of a commendable client roster of global technology giants.
Firstly, Arm’s CPU technology plays a key role in Apple devices.
Apple has integrated Arm's v9 CPU architecture in its M4 microchip that was unveiled in May.
This chip is expected to become the standard processor found in Apple MacBooks and Apple PCs going forward.
With demand for Apple devices as strong as ever (sales were up over 20% in the second quarter, making Apple the fastest-growing PC vendor, according to IDC), Arm’s royalty revenues are expected to benefit.
Positive momentum in the Android market and a resurgence in Internet-of-Things (IoT) demand will boost Arm’s royalties even further.
The recent decline in smartphone sales (a market where Arm technology is found in virtually all devices in the world) is well documented, but US investment bank Jefferies posits that the “strong consumer interest” in Android-based AI smartphones is driving a rebound.
“With most AI smartphones using Qualcomm and Mediatek chips based on v9 architecture, this smartphone momentum is also expected to help grow Arm's royalty rates,” said the bank in a research note published on Monday.
Arm also has exposure to the ongoing surge in cloud-based AI demand, since Nvidia uses Arm architecture in its Grace CPU product.
Although Nvidia’s GPUs form the foundations of AI-based computing, its CPUs are a crucial cog in the AI data centre space, thus adding another royalty conduit for Arm.
Put together, Arm’s royalties are projected to grow by 38% in the 2025 financial year, with a compound annual growth rate of 26% between 2024 and 2027, according to Jefferies analysts.
The positive sentiment is tempered by potential risks, including competition from open-source alternative Risc-V, slower-than-expected market share gains in infrastructure and consumer electronics, and possible complications with Arm China.
Jefferies has upgraded its Arm price target from $130 to $170 while retaining a buy rating on the stock to reflect the substantial royalty upside.
Arm shares were swapping for $150.50 in Monday’s pre-market. Arm is up 145% since parent company SoftBank floated the stock on the Nasdaq in September 2023.