Where will Arm Holdings stock be in 5 years?

It’s been just over a year since the British semiconductor company Arm holds (ARM 1.60%) went public, and those who invested in its initial public offering (IPO) are now enjoying gains of 121%.

Arm’s impressive stock market growth can be attributed to the company’s robust growth and solid outlook. The secular growth of the semiconductor market and the emergence of new catalysts such as artificial intelligence (AI) have been tailwinds for the company, which licenses its chip architecture to semiconductor manufacturers, consumer electronics companies, automotive companies and suppliers of cloud and networks.

Let’s look at Arm’s growth drivers and check why it could prove to be a solid investment for the next five years.

Arm’s addressable market suggests robust growth is here to stay

Arm’s recent results suggest there is strong demand for the company’s intellectual property (IP). Revenue of $939 million in the first quarter of fiscal 2025 (which ended June 30) was up 39% from the same period last year. License sales revenue rose 72% year-over-year to $472 million as the company closed what it calls “high-value license agreements” thanks to catalysts like AI. The huge installed base of Arm-based chips led to a healthy 17% year-over-year increase in royalty revenue to $467 million. Adjusted earnings rose 67% year-over-year to $0.40 per share.

The outlook for the full year is also solid. Arm’s management estimated revenue of $3.8 billion to $4.1 billion in the current quarter, along with earnings in the range of $1.45 to $1.65 per share. At the midpoint, its revenue would rise 22 percent from the previous fiscal year, along with an identical increase in its earnings. But don’t be surprised to see revenue and earnings hit the high end of the forecast range for a few simple reasons.

First, the growing need for the company’s chip architecture is driving demand for its licenses and helping to create a healthy revenue stream. This is evident from the remaining performance obligations (RPO) of $2.17 billion at the end of the previous quarter, an increase of 29% compared to the same quarter last year.

RPO refers to the total value of contracts that will be fulfilled in the future. So strong growth in this value is an indication of healthy revenue growth to come. At the same time, an increase in the number of licenses indicates an improvement in royalty income in the future. Arm receives a royalty from each chip manufactured using its IP, so as more customers acquire licenses to design its chips, the royalty streams should increase.

Second, the company’s latest architecture imposes a higher royalty per chip compared to previous versions. Customers have adopted the Armv9 architecture to realize more advanced processors with higher computing power and lower power consumption. The new architecture was developed with an eye on the AI ​​market as well, which explains its strong adoption.

Royalty revenue from smartphones grew more than 50% in the fiscal first quarter, while the number of smartphones sold grew only by mid-single digit percentages. Therefore, the new architecture should enable improved margins and robust profit growth.

Arm estimates its total addressable market to be $214 billion across multiple end markets such as automotive manufacturing, IoT, cloud and networking, among others. The company enjoys a healthy market share in almost all these markets. For example, it has a share of over 99% in mobile applications, 30% in consumer electronics, 41% in automotive manufacturing, 15% in cloud computing and 28% in network equipment.

How much can investors expect?

Given all of the above, the consensus estimates that earnings from the project will grow at an annual rate of 31% over the next five years. Based on fiscal 2024 earnings of $1.27 per share, its bottom line could reach $4.90 per share five years from now if it grows at this rate. And Arm seems capable of such a feat.

Assuming the stock trades at 46 times five-year earnings — which would be in line with the US tech sector’s multiple and a discount to Arm’s forward earnings multiple of 94 — it could rise to $225 a share action.

That would be 60% above the current price. And if the market decides to reward Arm with a higher earnings multiple due to its healthy growth, it could deliver even stronger earnings over the next five years.