What's next for Arm's stock price after Apple's partnership?
Here’s what could happen to iPhone 16’s chip designer.
Silin ChenSep 12, 2024 3:33 PM EDT
Arm doesn’t produce chips, but its design is probably in your smartphone.
Apple’s latest iPhone 16 series, featuring A18 chips that power its AI feature, Apple Intelligence, is using Arm’s newest V9 chip design, the Financial Times reported.
The UK semiconductor company has a multiyear licensing agreement with Apple.
Last year’s iPhone 15 Pro and Pro Max devices, which can also contain Apple Intelligence, were built on Arm’s previous generation V8 architecture.
Companies like Apple, Samsung, and Nvidia use Arm Holdings' central-processing-unit chip architectures. Arm then receives licensing payments and royalties based on the number of products sold.
License revenue comes from granting the right to use its intellectual property, while royalty revenue is the continuous fee payment based on the usage or sales of that IP.
Arm’s Chief Executive Rene Haas has said that the V9 chip design earns twice the royalties of the V8 generation, with estimated rates around 4%, compared with the average 1.7% royalty rates for prior generations.
This increase enables Arm to claim more revenue from each V9 chip sold.
“As a CFO, it’s one of the better business models I’ve seen. I joke sometimes that those older products are like the Beatles catalog: They just keep delivering royalties. Some of those products are three decades old,” Arm Chief Financial Officer Jason Child said in a CNBC interview.
Arm stock tumbled this summer
Arm's (ARM) fiscal 2025 first-quarter results, reported on July 31, exceeded analysts' forecasts, but the shares slumped due to tepid guidance.
The company earned 40 cents a share adjusted, beating Wall Street's expectation of 34 cents. Its revenue of $939 million was up 39%, higher than analysts’ consensus forecast of $902.7 million.
However, Arm maintained its full-year guidance of adjusted earnings per share between $1.45 and $1.65, with revenue expected to range from $3.8 billion to $4.1 billion. Analysts had projected adjusted earnings per share of $1.58 and revenue of $4.02 billion.
Despite a 40% slump in July and August, Arm stock has about doubled this year.
The surge in artificial intelligence activity will continue to drive chip sales in the coming years.
"As the energy needs of AI continue to escalate, so does the demand for the high-performance, power-efficient Arm compute platform," Haas said in a shareholder letter.
Arm a favored play on emerging Edge AI, Morgan Stanley says
A month ago, Bernstein upgraded Arm to market perform from underperform with a price target of $100, up from $92, following the 40% drop.
Bernstein said on Aug. 7 that Arm's valuation needed to be revisited, given the share price's 40% drop in four weeks and more confidence in mobile royalty growth.
Bernstein says V9 products will contribute significantly to the company's royalties, reaching 40% by the end of fiscal 2025. The analyst said Arm was gaining market share in the cloud-computing sector. Given these developments, Bernstein views the stock's potential risks and rewards as more evenly balanced at its current price.
Morgan Stanley affirmed a positive outlook toward Arm stock following the iPhone 16 release on Aug. 12 because of the utilization of Arm’s chip design.