Peel Hunt has reiterated its buy recommendation and 650p target price for chip designer ARM Holdings, saying that the stock is a ‘must-have’ following its investor day yesterday.
‘Rarely have we seen such an attractive investment case as that provided by ARM yesterday. Having lost some marketing ground to Intel in recent weeks, ARM gave a compelling account of how it sees its markets developing over the next five years. Our conclusion: ARM is a must-have stock and recent weakness has created an ideal entry point,’ said analyst Paul Morland.
The broker says that the business is well positioned and the attractions of the model are well understood in terms of the growth opportunity, revenue visibility, operational gearing and cash generation.
Morland said that the market continued to ‘underestimate the strength of its competitive positioning, high barriers to entry and the longer-term potential for royalty revenues.’
ARM gave guidance out to 2020 for the first time, saying it that it can continue to outperform the industry by 10-15%. This, the broker says, suggests around 23% compound annual growth rate at the high-end.
‘Given the laws of mean reversion, it is extraordinarily unusual for a company to feel able to suggest that it might grow at over 20% per annum for the next eight years. This sort of sustainability of growth puts the PE on which ARM trades in an entirely new light in our view.’
By 10:24 on Thursday, ARM was trading 0.77% higher at 486p.