Will Arm Holdings be a trillion-dollar stock by 2035?

Arm Holdings (NASDAQ: ARM)The company has attracted a lot of attention since its initial public offering (IPO) last September. Shares of the British chip designer went public at $51 and have more than doubled in the past six months to about $125.

However, Arm's stock hasn't skyrocketed. Instead, for the first two months, Arm's stock price hovered around its IPO price as investors scoffed at its slowing growth and overvaluation. However, its growth has accelerated again, and the bull market is back, with Arm's market capitalization climbing to nearly $130 billion. Can it continue to rise and become a trillion-dollar stock by 2035?

Understanding Arm's Business Model

Founded in 1990, Arm isApple Inc.VLSI Technology is a company owned by Acorn Computers and VLSI Technology. It aims to develop a new chip design that challenges theIntelThe dominant x86 chip architecture.

By prioritizing battery life and technology activity over raw horsepower, Arm has gained a foothold in small handheld devices rather than personal computers and servers. Today, more than 95% smartphones worldwide use Arm-based chips. Intel's stubborn attempts to shrink its x86 CPUs for mobile devices have driven it out of this lucrative market.

Arm doesn't make its own chips. It only licenses its designs to Apple,Qualcommrespond in singingUNIDENTIFIED MALEand other chip makers.NvidiaArm is also licensed to design its Tegra CPUs. This asset-light business model, coupled with pricing power in the mobile market, has enabled Arm to maintain a gross margin of around 90%.

How fast does Arm develop?

Arm originally went public in 1998, but in 2016 it was acquired by the Japanese conglomerateSoft SilverAcquisition. Subsequently, SoftBank nearly sold Arm to Nvidia for $40 billion, but antitrust regulators rejected the deal in 2022. After the attempted sale, SoftBank spun off Arm in a new IPO, but validated 90.6% of the company's shares.

Arm's revenues grew 33% in fiscal 2022 (ended March 2022) as smartphone makers rolled out more 5G devices, but declined 1% in fiscal 2023 after a slowdown in the 5G upgrade cycle.Arm's revenues grew 13% year-over-year in the first nine months of fiscal 2024 as the smartphone market stabilized and its growth in the cloud computing and automotive markets and higher AI optimized chip designs boosted its royalty revenues. In the first nine months of fiscal 2024, Arm's revenues increased 131 TP3T year-over-year as the smartphone market stabilized, its growth in the cloud and automotive markets, and higher AI-optimized chip designs boosted its royalty revenues.

Arm expects full-year revenue growth of 18% to 20%. analysts predict a compound annual growth rate (CAGR) of 22% from FY2024 to FY2026. that's impressive, but probably not enough for a stock that's already priced at about 40 times this year's sales.

Is it possible for Arm to be valued at a trillion dollars?

Arm's market capitalization is so high because it's labeled an artificial intelligence (AI) stock, but investors shouldn't just throw Arm in the same basket as Nvidia. But investors shouldn't just throw Arm and Nvidia into the same basket. arm certainly gets higher royalties from its latest Armv9 designs-which can be used to power the AI features of High-B耑 smartphones, PCs, and even servers-but they're not nearly as powerful as Nvidia's GPUs when it comes to complex AI tasks. But they're not nearly as important as Nvidia's powerful GPUs when it comes to complex AI tasks.

Assuming Arm still sells at 40x analysts' estimates and grows revenue at 20% CAGR from FY2026 to FY2035, it could be valued at $1 trillion by the end of the year. That seems like an achievable goal, but I doubt it will be able to maintain that eye-popping price-to-sales ratio when investor interest in AI stocks finally cools off.

If Arm achieves these goals and reaches 20 times sales by fiscal 2035, it will still be worth $500 billion. This would represent a four-fold gain compared to current prices, but it would probably disappoint investors who were expecting a bigger return.

Should you invest $1,000 in Arm Holdings now?

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Leo Sun has a position in Apple, The Motley Fool recommends Apple, NVIDIA, and Qualcomm, The Motley Fool recommends Intel, and recommends the following options: Intel January 2023 $57.50 Call Options Long, Intel January 2025 $45 Call Options Long, and Intel May 2024 $47 Call Options Short. The Motley Fool has a disclosure policy.

Will Arm Holdings Be a Trillion-Dollar Stock by 2035? This post was originally published by The Motley Fool.