Arm Holdings (NASDAQ:), the chip-design company, made its debut on the New York Stock Exchange (NYSE) recently, experiencing an initial surge in share price before settling close to its listing price. However, financial analysts from Susquehanna Financial Group, Christopher Rolland and Mehdi Hosseini, have urged investors to exercise caution as they believe the company’s stock is currently appropriately valued.
On Friday, Arm Holdings’ shares fell by 1.7% to $51.32, a significant decrease from their peak of over $60 per share reached shortly after the company’s initial public offering (IPO). The IPO was priced at $51 a share.
Rolland and Hosseini initiated their coverage of Arm with a neutral rating, setting a share-price target of $48. This target was calculated based on an enterprise value that is 15 times Arm’s forecast sales for 2024. Despite the company’s role in advancing artificial intelligence (AI), the analysts identified several challenges that might affect its market performance.
The primary concern raised by the analysts is the sluggish growth in mobile handsets, currently the largest market for Arm’s chip designs. They suggested that these circumstances might necessitate Arm to increase its royalty rates and diversify into new sectors in order to justify its premium valuation.
The analysts also pointed out potential risks associated with expanding royalty rates for core customers and margin contraction linked to additional revenue streams. As a result of these factors, Rolland and Hosseini concluded that Arm Holdings should trade at a valuation discount compared to its stock performance over the past decade.
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