Why Arm Holdings Stock Was Moving Higher Today

Key Points

• BNP Paribas upgraded its rating on Arm Holdings.

• The bank sees it benefiting from a push into custom chips.

• The stock remains expensive, but its future is promising.

• 10 stocks we like better than Arm Holdings ›

Shares of Arm Holdings (NASDAQ: ARM) were climbing today as one Wall Street analyst took a brighter view of the company.

In a note this morning, BNP Paribas raised its rating on the CPU architecture specialist from neutral to outperform, and lifted its price target from $110 all the way up to $210.

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As a result, the stock was up 4.2% as of 1:11 p.m. ET.

Image source: Getty Images.

Arm moves into ASICs

The bank upgraded the stock as analyst David O'Connor said that its new ASIC (application-specific integrated circuit) business, which refers to custom chips, could double the company's operating profit, even if it only captured 7% of the addressable market.

O'Connor also said that there's still "significant upside" in the stock, as the ASIC product line is not being fully valued.

By nearly doubling the price target on Arm, the analyst is giving the stock an implied upside of 40%.

Arm is moving further into custom chips, scoring Meta Platforms as its first major customer in February. The move represents a shift from the company's historical business model of licensing its architecture designs, but it also exposes it to a large market, and investors have priced in growth as the company trades at a high valuation.

Can Arm keep climbing?

Arm stock is expensive, trading at a price-to-sales ratio of 38, but the stock deserves a premium. Not only is it delivering strong growth and impressive margins, but it has a resilient business model of licensing its battery-efficient CPU technology, which has given the company a competitive advantage in markets like smartphones and, increasingly, data centers.

Additionally, its combination of revenue streams from licensing and royalties also ensures it has a long pipeline of revenue. The business is in great shape, though Arm's growth will be tested by its valuation.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Jeremy Bowman has positions in Arm Holdings and Meta Platforms. The Motley Fool has positions in and recommends Meta Platforms. The Motley Fool has a disclosure policy.