Arm Holdings soars 64% after strong earnings shed light on its exposure to the growing AI industry

• Arm Holdings soared as high as 64% on Thursday after it reported third-quarter earnings results.
• The better-than-expected earnings highlighted Arm's growing exposure to artificial intelligence.
• Arm Holdings went public in September after its proposed merger with Nvidia was shot down by regulators.

Arm Holdings stock soared as much as 64% on Thursday after the company reported better-than-expected third-quarter earnings and highlighted its growing exposure to artificial intelligence.

Arm Holdings went public in September after its proposed $40 billion merger with Nvidia was dashed due to regulatory concerns back in 2022.

The earnings results show that Nvidia's proposed deal for Arm would have been a boon for the company if it had gone through. Arm Holdings gained $47 billion in market capitalization on Thursday, jumping to a $126 billion market valuation.

Here are the key results from Arm's third-quarter earnings report:

• Revenue: $824 million, vs analyst estimates of $763 million
• Adjusted earnings per share: $0.29, vs analyst estimates of $0.25

The company's bullish guidance for 2024, in which it increased its adjusted earnings per share estimate to $1.20 - $1.24 from prior guidance of $1.00 - $1.10, helped boost excitement for Arm Holdings stock. The company also increased its 2024 sales forecast to $3.16 billion - $3.21 billion from prior guidance of $2.96 billion - $3.08 billion.

"We are also seeing strong momentum and tailwinds from all things AI. From the most complex devices on the planet for training and inference, the NVIDIA Grace Hopper 200, to edge devices such as the Gemini Nano Pixel 6 from Google or the Samsung Galaxy S24, more and more AI is running on more end devices, and that's all running on Arm," ARM CEO Rene Haas said on the earnings call.

Here's what Wall Street is saying about Arm's earnings results.

Goldman Sachs: 'We are particularly bullish on the Data Center opportunity'

"Consistent with our thesis at the time of our initiation, we expect Arm to not only grow dollar content in smartphones, primarily through higher royalty rates, but to also extend its reach across applications to which it is under-indexed today including Data Center, Automotive, and IoT," Goldman Sachs said in a note on Thursday.

"We are particularly bullish on the Data Center opportunity given Arm's power-efficient characteristics and growing customer traction across the likes of Amazon (Graviton CPU), Microsoft (Cobalt CPU) and Nvidia (Grace CPU)," Goldman said.

Goldman Sachs reiterated its "Buy" rating and increased its price target to $95 from $65.

JPMorgan: Earnings results show 'a strong growth profile' for Arm

"The rise of accelerated compute/AI workloads in the datacenter, edge, and endpoints is driving the requirement for significantly more compute capability and power efficiency per device and motivating ARM's customer to adopt their highest performance compute IP and host of other IP building blocks which is driving higher levels of licensing activity (and $$ spend)," JPMorgan explained in a Thursday note.

All of this is creating "a strong growth profile" for Arm's licensing and royalty units.

"Overall the solid results/outlook is tracking in-line to our investment thesis where we believe Arm is well-positioned to drive an 18%+ revenue CAGR (40% EPS CAGR) for the next three years on higher IP content (driving higher royalty rates), market share gains against proprietary/legacy compute architectures, and ARM's growing market penetration into the highest growth segments of the market like AI, auto, IoT, and datacenter compute," JPMorgan said.

JPMorgan reiterated its "Overweight" rating and increased its price target to $100 from $70.