ARM STOCK ANALYSIS - The Best AI Stock? Still a Buy or Wait?
Hello friends this Victor here welcome back to the intelligent investor channel in this video I'm going to analyze ARM Holding stock I'm going to talk about whether arm stock is one of the best AI stocks over the long term more importantly I will talk about whether I think ARM Holding stock is under value fairly value or substantially over value now as always I like to give you more context first arm became a public company again in September 2023 when it went I p in September 2023 the company's market value was as high as 62 billion now at the time making this video arms market value is nearly 190 billion this is over three times arms initial market value one of the biggest reason is that arm is benefiting a lot from the current AI boom as you may already know arm has a monopoly in the smartphone market Arm based processors and S so's are in 99% of smartphones such as iPhones and Android phones and in most tablets such as iPads and Android tablets going forward investors expect the arms revenues and net profits will likely grow much faster than before because of high licensing fees and high royalties from on based chips of course we have to be realistic at the same time right now many AI stocks have grown much faster than their expected earnings growth so in this video I will explain whether I think arm stock is substantially overwhite now you will learn about these topics in this video first I will give you a quick stop a full update then I will talk about arm Holdings biggest risk to consider arms lter go prospects arm stock version and will I buy arm stock if you like this video make sure to hit the like button subscribe and turn on the notification button I will continue to make many excellent stock analysis and investing videos every week that will help you become a gr investor each video usually takes me 20 to 30 hours to make so if you like this channel and want to support it check out my patreon blog in the window description our goal is to help all our members become multi-millionaire through investing once you become a premium member you can follow all the stocks I'm investing for the long term follow my personal stock portfolios and download the latest intrinsic valtion models for all the stocks I'm analyzing so you will know when a stock becomes under value fairly value or overw now also you will have access to all my latest stock ratings The link is in the video description take a look let's start at the time of making this video the market as represented by the S&P 500 is dominated by the mega capap tech stocks in fact the manificent sell stocks Nvidia Microsoft Apple Google Amazon meta and Tesla make about 30% of the S&P 500's market value currently the S&P 500's year-to dat return is around 70% but most of the S&P 500's year- to-day return is from the manificent 7 stocks according to the Wall Street Journal the manificent selling stocks are responsible for about 60% of the S&B F total return this year without the manic s stocks the S&B fion Total return will be much lower this year according to yaho fance analysts have estimated that the S&P 500 company's earnings will continue to recover throughout 2024 and the first half of 2025 this means the market will likely recover more going forward but a lot percentage of this earnings growth will be coming from the mega cat tech stocks especially from the Maleficent selling stocks so what does this mean to you going forward it means that your portfolio will likely underperform the S&P F if you don't have a large exposure to the largest Mega cap tech stocks these Manu selling stocks as a group are the best and most competitive companies in their Industries most of them have very large economy modes most of them are near monopolies they generate the most profits and most free CS compared to competitors they are benefiting the most from the current AI Revolution so naturally I believe they will likely outperform the S&P 5 at least throughout this year and perhaps throughout next year I want to show you one of my stock portfolios before talking about ARM Holding stock I always show this portfolio in my investing videos to explain my investing strategies over time this portfolio is separated into three different accounts this is the first account this account is performing exceptionally well it's all performing the sa function by a very large margin because I mainly invest in the best mega cap tech companies that are the best in their Industries you can see that there are several multier stocks in this account such as Microsoft MasterCard Visa Amazon tsmc and Google I bought them where they were much more under way before last year if you have been following my channel you may remember I said that it's best to keep investing in the manificent 7 stocks because they are the best and most profitable companies in the S&P 500 I've been right so far this is the second account this account is also performing exceptionally well compared to the S&P 5 there are several multier stocks such as Apple Google Microsoft visa and tsmc I made the mistake of selling Nvidia for a quick profit before so I bought back more Nvidia earlier this year I will likely buy back more Nvidia going forward I'm just waiting for a large dip this is a third account it's a much newer account the other two accounts I bought many of these stocks over the past one and a half years so it will take time for them to become multi Banker stocks recently Tesla and Salesforce have recovered a lot I decided to sell some Tesla shares for a very small profit because I wanted to use the money to invest in other companies I'll probably regret selling Tesla too early again I expect Tesla will recover even more once interest rates are much lower in North America and once the entire even Market start recovering overall I expect that most of these companies will grow exponentially over time because they are the best and most profitable businesses in their Industries most of them such as Microsoft Nvidia tsmc Google Amazon synopsis meta and Blom are benefiting a lot from AI let's go back to arm Holdings I think it's very important to understand arms business model and biggest risk first so what's arm and how does arm earn its revenues arm Holdings is a British semiconductor software design company is known for developing the arm architecture which is wiely use in 99% of smartphones and tablets and in many intern of things iot devices arm processors are also found in many electric vehicles and B systems and increasingly in servers and AI supercomputers arm processors are most popular in mobile devices because they are generally much more power efficient and still have very high performance per watt compared to 86 processors that are made by Intel and AMD here's the important part about arm's business model arm specializes in designing microprocessor IPS arm does not manufacture its own chips instead arm licenses its chip design technology to other companies which then produce the physical chips arms designs are based on reduced instruction set Computing risk principles which emphasize efficiency and performance arm earns its Wellness from two main sources licensing and roll at the to making this video license Revenue contributes about 45% of arms total values and royalty contributes about 55% of arms total values going for a royalty is expected to contribute the most values to arm over the long term I'll talk more about this throughout this video here's how it works first arm licenses is processor designs and other Technologies to semiconductor companies oems and system integrators these licenses allow arms clients to ufacture chips based on arms designs customers need to pay arm licensing fees to use arm's latest chip designs and IPS second in addition to licensing fees arm earns royalties from each chip produced that uses it arm designs this means that for every device that incorporates An Arm based chip arm receives a small percentage of the selling price or a fixed amount per unit according to monar Arms Roy rates for its newest architecture v9 are around 4% to 5% which is double those of its predecessor V8 for the older architecture AR earns about 1% to 2% of royalty fees from every Arm based chip that sold for the newest arm v9 architecture arm earns around 4% to 5% from every Arm based ship that sold as long as arm is continually innovating investing in R&D every year and introducing newer chip architectures that are more performance and more power efficient arm will earn high Roy fees and high licensing fees from its customers over time here's arm's biggest risk wish should consider arm's royality Rue is largely dependent on smartphone sales the automobile market and the overall semic cond Market arm ears a very large percentage of Roy values from Apple quop Samsung and many Chinese smartphone makers right now the smartphone market is slowly recovering but if there's a huge correction in the smartphone market such as in 2023 arms Roy Revenue would increased by Lots the same thing applies to the overall semicond Market if there's a large correction in the semicond market we can expect that arm will earn lower volty values from the intern of Tanks iot devices and consumer electronics that use Arm based processors this is second risk we consider arms grow margin is exceptionally High arms grow margin has been well above 90% for many quarters arms operating margin has been above 40% in recent quarters but this is not a full story I think these non Gap margins are a bit misleading let me explain it here if you look at arms's most recent annual report you will see that arms Gap operating margin was only 3.4% in fisal 2024 but its long Gap operating margin was much higher at nearly 44% in physical 2024 so why was there a huge discrepancy between arms Gap operating margin and it's long Gap operating margin arms biggest operating expense is reseearch and Dev vment or R&D every year in order to stay competitive arm has to invest at least 30% of its total value in R&D which is very common for fast growing companies stock base compensation is the biggest expense within R&D armor has to pay a lot of stock options to employees mostly Engineers every year in order to develop better chip designs IPS and chip architectures for customers in physical 2024 arms actual R&D was around 61% of the company's total value which was extremely high excluding this stop based expenses arms R&D was around 35% of the company's total revenue which was still very high stop based compensations are non-cash expenses but they are still real expenses to the company arms management decided to pay employees a lot more stock options instead of cash because it would make the company's non Gap operating margins and free curse Mar much higher of course this is a very common practice for many fast growing companies but I think this is a bit misleading for investors who don't study accounting this is my prediction going for I believe arm will invest at least 30% of its total values in R&D each year because arm wants to stay competitive and release better architectures and Chip designs earlier so that means arms capap operting margin will will likely stay very low in the single digit percentage over the next several years I want to show you this financials here I believe arm has a strong balance she at the time of making this video arm has around 2.92 billion of cash equivalents and short-term investments in comparison arm only has around 231 billion of operating leas liabilities this means arm can pay off its operating lease liabilities in our W and still have 2.7
billion of cash left when it comes to investing we also need to look at stock valtion it doesn't make sense to over pay a stock no matter how much growth potential the business has according to analyst estimates here arms value is expected to grow anywhere between 15% and 25% each year over the next 5 years arms EPS is expected to grow faster than its Revenue growth over the next 5 years here's the important part at the time this video arms forward PE is well above 100 if arms EPS grows at this rates arms 4p will still be slightly above 50 5 years from now this is from second Alpha arms 4 PE is expected to be above 110 and it's 4 PE is expected to be almost 60 around 4 years from now I think this 4 P suggest that arm stock is substantially overweight now this is another risk we should consider soft Bank is still the largest shareholder of arm soft Bank owns approximately 88% of arm this means soft Bank still has nearly 100% control of arm investors like us will have no control over arm scad strategies even if arm is paying too many stop options to employees at the expense of margins in terms of competition arms biggest competitors are x86 architecture which is own by Intel and AMD and open source risk F architecture this is from Morning Star the analyst here did a great job explaining arms biggest competitor risk F I don't think the risky architecture can disrupt arms chip design and IP business in the long run because it's very costly and timec consuming for large chip makers and large chip designers to switch their architectures from arm to risk F time to Market is very important for the largest chip designers arms ecosystem is much larger than risk five arms ecosystem is well supported by millions of developers around the world arm-based processors are generally much more powerful and more energy efficient than risk five chips risk five architecture is the main Challenger to arm just as arm is a challenger to x86 in the data center risk f is a very simple and open source architecture where developers can modify the architecture without having to pay an architectural license this allow startups to save cost and have more freedom but in exchange add engineer complexity and a longer time to market then directly licensing arm arm also provides centralized customer support and cyber security whereas in Risk five support is scattered over the ecosystem and you may have to find a solution yourself architectural license fees are a small part of a chip design cost around 15% so in our view established players have little incentive to switch to another architecture just to avoid paying a few dollars per chip to arm for startups the Ral is different as the architecture is one of the first expenses you face When developing a new chip and going for free option might be worth it hence We Believe risk F will remain a Challenger in cheaper less critical applications given is a young ecosystem that still needs to develop technically and economically the risk F ecosystem is grow and getting support from established players but its CPUs cannot match arm in power efficiency performance and customer support yet even if risk fire would manage to disrupt arm in the long run this process could take a long time which give us confidence in our wide mod rating let's talk about arms longer growth prospects so you will know whether arm is one of the best AI companies for longterm investing I want to show you this Revenue guidance from arms management arms management expects that the companies Revenue will grow by about 22% year over year in phisical 95 over the longer term ours management expects that the company's total value should grow at least 20% year-over-year for each of the fiscal years ending in 20 26 and 2027 this means we can expect that arms total value will likely grow at least 20% year-over-year over the next two to three years I believe this Rue growth guidance is reasonable for arm because of several growth Catalyst management explain these growth Catalyst that are benefiting arm Now growth will be driven by Roy value we expect the demand for Arm based Compu to continue across all market segments especially as AI is devel in virtually all applications from the most advanced data centers to the smallest Edge devices all this extra Compu requires increased performance with less power consumption which is driving the need for arm's most advanced technology such as arm v9 into smartphones servers smart iot and networking devices chips based on rv9 technology now cons sh build around 20% of royaly Revenue up from around 15% last quarter growth will be drift by the need for more energy efficient computer and AI capability from the data center to Edge Computers as the mouth compute to run this complex AI workflows is increasing exponentially the amount of energy required will increase too according to our 20123 report from Boston Consulting Group us data centers already consume around 126 ter hours per year and this is expected to rise three4 by 2030 arms data center customer customers are reporting substantial performance per VA savings compared with Legacy architectures and this contributes to why arms energy efficient technology is being chosen to help run these workloads Google recently announced his first custom arm-based a product which provides 50% better performance and up to 60% better Energy Efficiency compared to Legacy architectures and will be used to run AI training and inference 10 of the world's largest hyperscalers are deploying arm-based chips for their data centers including Amazon web services Microsoft and Oracle Cloud Nvidia also recently anounced their gray blackw super chip that combines nvidia's blackw GPU architecture With An Arm based gra CPU this provides significant power savings compared to running a GPU alongside a legacy Surfer chip arm technology provides similar power efficiency for chips in PCS smartphones automo applications and networking increment and as AI goes everywhere we believe it will be unable by our technology let me explain arm SCH drivers more here arm will continue to invest a very large percentage of Revenue in R&D each year this will allow arm to release new architectures faster that will have higher performance and that are much more energy efficient than previous strength architectures the biggest Advantage is this arms new architectures such as the arm v9 CPUs will generate higher royalty rings than the previous V8 and other architectures the biggest downside is this Army will likely need to invest at least 30% of its total value in R&D each year this means we can expect that arms Gap optain margin will likely stay very low in the single digit percentage over the next several years arms latest v9 architecture will earn a substantially higher Roy per chip compared to previous generation architecture es Morning Star estimate that armv nights Roy rates are around 4% to 5% in comparison arms previous generation architectures Roy rates are typically around 1% to 2% for every Arm based ship that sold here's the important part customers are adopting arms Vena architecture much faster than previous generations this means arms value will likely a sell more going forward because of the very large demand for high performance and and energy efficient chips in smartphones tablets autonomous driving electric vehicles and now ai data centers this is another growth driver for arm this is one of arm's biggest competitive Vantage according to arm the company is still collecting roties from Arm based products that were developed in the early 1990s this means arm will continue earning roties from the older Arm based chips while earning high roties from the much newer Arm based chips our I want to show you this market share data here it shows arm spest growth markets going forward arm already owns 99% of the mobile market almost all iPhones and Android phones use Arm based processors in comparison arm is still underpenetrated in many other markets such as consumer electronics Cloud computer and Automotive before most of arm's value came from the mobile market now arm has Diversified to other major markets such as automobile cloud and networking intern of things iot and consumer electronics the mobile market is very mature is still one of the biggest markets for arm arm will continue earning High Roy fees from Apple Samsung quop and many major smartphone makers and Chip designers because these companies we will continue selling more Arm based smartphones and mobile devices over time as of now one of the biggest Trends is spring and AI models to run locally on iPhones and Android smartphones this means the major smart makers will need to invest in the latest arm v9 architecture that pays High Roy fees to arm also the smartphone market is slowly recovering once the smartphone market recovers we can expect that arm we earn higher Roy values from Apple Samsung and qualcom outside of the mobile market arm is aiming to capture 50% of the PC market in about 5 years I don't think this is realistic at all I believe Armco is being too optimistic here here's what why the PC market is dominated by x86 CPUs made by Intel and AMD most Windows apps and PC games are developed for x86 CPUs many PC apps and games do not run well on arm-based computers x86 chips are supported by millions of developers and PC makers around the world is very costly and timec consuming for developers to optimize their PC apps and games for arbas ships AMD and Intel will enjoy produce more energy efficient x86 chips to compete with Arm based chips going forward so it will not make sense for developers to spend the time and money to optimize their PC apps and games for unas chips apple is the exception here Apple controls both the hardware and the software so it's a lot easier for Apple to optimize its apps for its Arm based Maxs out of the mobile market I believe the data center Market will be the biggest SC drive for arm going forward as you may already know power consumption is the biggest cost in running AI data centers many large hyperscale Cloud providers and the largest chip designers are making their own arm-based data center CPUs because Arm based CPUs are generally much more energy efficient than x86 chips right now Arm based chips can often perform as well as x86 chips in many cloud computing and a workloads Google is making arm-based xon CPUs mostly for internal and Google Cloud Computing workloads Amazon already has its own Arm based graphon CPU Nvidia is already making the Arm based gr CPU that will be combined with two Nvidia Blackwell gpus this will be the grace Blackwell super cheat gb200 also and's nextest J V CPU will be Arm based so all these arm-based CPUs made by the largest data center customers will benefit arm the most because they will provide higher licensing fees and higher wey fees for I'm going forward I want to show you this consensus forecast from second Alpha so you will know arms expected growth R going forward arms valy is expected to grow over 20% each year over the next two years after that arms valy is expected to grow slightly below 20% each year over the next several years in terms of eps forecast arms EPS is expected to grow higher than its value growth over the next several years I think the biggest reason is that AR is expected to earn high royaly values from its v9 architecture going forward at the same time arms operating expenses are expected to grow slower than its value growth over the next several years I want to show you this interesting was model here I always use this interest model to calculate each stocks interest value you can use it to calculate arm stocks interest value so you will know when arm stock becomes under value fairly value or over value if you want this interest model you can download it from my P Paton block the link is in the video description these are the key assumptions in this calculator first I Define arm stocks in wi as it future free cast discounted to the present day I used a discount rate of 11.5% here you can use a high discount rate here if you want to be more conservative based on the biggest risk and the longterm goals possible as I talked about earlier I believe arms family will grow a compound and goow a CER between 20% and 25% each year over the next several years this Rue growth rate is slightly higher than the consensus Rue forecast I showed you earlier I'm using a 30% free C for martion here this free cust Mar is higher than before because I believe arm will become more profitable going forward let's go for these three case scenarios worst case normal case and best case scenarios under the worst case scenario we fusing that arms value will grow a k of 20% over the next several years then arms inase should be around 100 11 billion for the entire company or $15 per share I'm giv this scario a 25% probability here under the base case scenario we're forecasting that arms value will grow a k of 22.5% over the next several years then arms interest while should be around 123 billion for the entire company or $116 per share um given this a 50% probability here under the best case scario with forecasting that arms value we grow a k of 25 5% over the next several years then arms interest should be around 136 billion for the entire company or $128 per share I'm given this a 25% probability here if we add all these numbers here arms in while you should be around $170 per share I also use the four salw model to estimate arms in value which should be around 9 billion for the entire company or about $103 per share if we take the average of both W models here I believe arms in ch should be around $110 per share just to compare Morning Star gave arm a much lower Fair wi of $66 per share this means I believe ARM Holding stock is substantially overweight now the four pees I show you earlier also suggest that arm stock is likely greatly overweight now so will I buy arm stock my answer is no I'm not planning to buy armor holding stocks at the current price because I believe it's substantially overr now I will only consider buying it if it dips below my interest value if I buy it I will only buy a very small position overall I believe arm has a very large economic mode especially in the mobile market I believe arm will have the biggest growth opportunities in the AI Data Center Market because the largest data center customers such as Amazon Google Microsoft and meta want to use Arm based CPUs that are much more power efficient than x86 CPUs use I don't think arm can compete well in the PC market because it's too expensive and time consuming for developers to optimize their PC apps and games for Arm based chips now all these are only my opinions and my analysis based on my research they are not Financial wise there are always risk associated with investing it's very important to invest in what you know and not speculate you will need to do your own research and do your ex du D first before investing in anything thank you for watching this video and supporting our Channel this vict from the intell channel and I will see you in the next video
2024-07-18 07:15
