Advanced Micro Devices (AMD) is one of the stocks most watched by Zacks.com visitors lately. So, it might be a good idea to review some of the factors that might affect the near-term performance of the stock.
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Lisa Su became CEO of Advanced Micro Devices (NASDAQ: AMD) in 2014. During that time, AMD faced an uncertain future, and many investors believed it was going bankrupt.
Shares of Softbank (
SFTBY
)-backed Arm Holdings (
NASDAQ:ARM
) made a stellar stock market debut on September 14,
rallying 25% on the first trading day. However, the chip design company’s stock quickly shed those gains and currently trades at $52.51, which is below the closing stock price of $63.59 on September 14. Wall Street analysts are cautious about the stock due to several concerns, including its high valuation and exposure to China.
Wall Street is Sidelined on ARM Stock
Arm does not manufacture chips but licenses its architecture to other chipmakers and original equipment manufacturers (OEMs). The company claims that its central processing units (CPUs) have enabled advanced computing in over 99% of smartphones worldwide. Arm’s technology also powers operating systems and applications for mobiles, personal computers, tablets, data centers, networking equipment, and vehicles, among other things.
However, Arm faces competition from the open-source RISC-V chip architecture, which gaining traction, with many of Arm’s customers also showing interest in it. The company also faces competition from the advanced x86 architecture developed by
chip giants Advanced Micro Devices (
NASDAQ:AMD
) and Intel (
NASDAQ:INTC
). While ARM leads the smartphone end market, these rival technologies have a strong hold over the laptop and data center end markets.
Other risks to be noted include the company’s exposure to China amid the growing U.S.-China tensions and weakness in top-line growth due to a dull smartphone market. Another risk is revenue concentration, with the company’s top five customers (including Arm China) accounting for about 57% of the overall revenue in the fiscal year ended March 31, 2023.
On September 22,
Susquehanna analyst Mehdi Hosseini initiated coverage of Arm Holdings stock with a Hold rating and a price target of $48. The analyst thinks that stock has a fairly valued risk/reward. He also pointed out the weakness in the mobile market, the company’s largest end market. Additionally, the microcontroller market, Arm’s second largest end-market, has started to reach market share saturation.
The analyst is concerned that if Arm tries to achieve further growth in these areas by forcing a higher royalty rate, it might incentivize customers to explore alternatives.
Meanwhile, on September 25,
Bernstein analyst Sara Russo reiterated a Sell rating on ARM stock with a price target of $46. While the analyst likes the company’s fundamentals and its dominant position in mobile, she feels that the company is not immune to the sluggish smartphone market. The analyst believes that it will take time to see improvements in mobile royalty rates.
Russo said that her estimates for mobile royalty rates in FY27 and consequently revenue growth expectations remain below management’s estimates.
Is Arm Holdings a Good Stock to Buy?
Currently, Wall Street has a Hold consensus rating on Arm Holdings stock based on one Buy, three Holds, and one Sell rating. The average price target of $50.75 implies a possible downside of 3.4%.
Conclusion
Arm Holdings expects its total addressable market to grow at a 6.8% compound annual growth rate to about $246.6 billion by 2025, driven by prospects in lucrative areas like
artificial intelligence and cloud computing. However, Wall Street feels that the positives are already baked into the stock and does not see any upside due to the risks discussed above.
Disclosure
OpenAI, the company behind ChatGPT, is exploring making its own artificial intelligence chips and has gone as far as evaluating a potential acquisition target, according to people familiar with the company’s plans.
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Chipmaker Intel said on Tuesday it plans to operate its programmable chip unit as a standalone business starting January next year, with plans to hold a public offering for stock in the business over the next two to three years.
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