Why Arm Holdings Stock Rallied on Thursday
Key Points
Arm Holdings will benefit from the increasing adoption of agentic artificial intelligence.
The company's CPU designs are the industry standard, and Arm receives license and royalty revenue from each chip.
The stock is pricey, but its long-term outlook is bright.
Shares of Arm Holdings (NASDAQ: ARM) climbed sharply higher on Thursday, rising as much as 8.7%. As of 11:45 a.m. ET, the stock was still up 6%.
The catalyst that drove the semiconductor specialist higher was an aggressive price target increase and bullish commentary from a Wall Street analyst.
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Long-term tailwinds
Bank of America analyst Vivek Arya maintained a neutral (hold) rating on Arm Holdings and raised his price target to $335 from $245 -- so the analyst was clearly playing catch-up. That represents potential gains for investors of 9% compared to Wednesday's closing price.
The analyst raised his outlook for the global CPU market to $170 billion over the next five years, up from $125 billion, suggesting 37% compound annual growth by the end of the decade. Arm is the leading supplier of CPU design and architecture, so this forecast is a positive development for the company.
The analyst went on to say that the adoption of artificial intelligence (AI) agents will increase the market for CPUs because the decision-making process used by agentic AI is uniquely suited to CPUs. These secular tailwinds will act as a "powerful demand accelerant that expands the CPU opportunity and lifts both x86 incumbents and Arm challengers."
Earlier this year, the company unveiled the Arm AGI CPU, the first time it has released its own chip. Management updated its long-term forecast and expects to generate $25 billion in annual revenue and $9 in earnings per share by 2031, with $15 billion from sales of the Arm AGI CPU.
To be clear, Arm sports a frothy valuation, selling for 106 times next year's expected earnings. However, if management's guidance is accurate, the stock is selling for 34 times 2030 expected earnings, which makes it just a bit more reasonable.
Bank of America is an advertising partner of Motley Fool Money. Danny Vena, CPA has no position in any of the stocks mentioned. The Motley Fool recommends Arm Holdings. The Motley Fool has a disclosure policy.