Is Arm Holdings plc (NASDAQ:ARM) A Good Hardware Stock To Buy According To Goldman Sachs?

We recently compiled the list of the 15 Best Hardware Stocks According To Goldman Sachs using the latest sentiment data. In this article, we are going to take a look at where Arm Holdings plc (NASDAQ:ARM) stands against the other hardware stocks.

The soaring popularity of artificial intelligence for consumer and business applications has injected fresh life into the computing industry. If we're to rewind the hands of time and go back to 2022, the stock market environment was considerably different from what it is now. All major technology stocks, including those that are responsible for making chips that power AI workloads were down by double digit percentages in the wake of breakneck inflation and rising interest rates.

Fast forward to 2024 and the rise in valuations seems to have no end in sight. One bank that's quite optimistic about artificial intelligence is Goldman. Goldman's analyst teams are among the best in the world, and they spend countless hours analyzing stocks and industries for the right set of picks that could disrupt the industry.

On this front, Goldman came out with a note recently that outlined a new beginning for the computer hardware industry. According to the bank, the introduction of AI has necessitated a global shift to new hardware that can support the technology. In its note, the bank's analysts shared:

During the pandemic, the tech hardware industry peaked as the majority of work-from-home employees purchased equipment. The space currently has fully unwind this cycle and we notice stocks like HPQ trading at 9x their 2025 earnings estimates.

Most PCs purchased during the pandemic are expected to be replaced soon. We expect discernable new features of AI, enhanced security, and stronger computational power in upcoming PC and mobile device models, incentivizing the US consumer to spend more on newer equipment than historically, creating an unusually stronger cycle.

Goldman also created a basket of stocks where the highest weighted stock has an 8% weight and there are 20 stocks in the basket. According to Goldman analyst Faris Mourad:

The basket is composed of technology hardware stocks that may benefit from PC and mobile device renovations that could include AI features. The basket can trade up to $250m in one day with no name exceeding 10% of ADV.

Considering this optimism, we decided to take a look at the top Goldman's top 15 hardware stock picks.

Our Methodology

To make our list of the top Goldman Sachs hardware stocks, we used the top holdings of the bank's PC & Mobile Device AI Upgrades basket (GSXUPCAI).

For these hardware stocks, we also mentioned hedge fund investors. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

6. Arm Holdings plc (NASDAQ:ARM)

Number of Hedge Fund Shareholders In Q1 2024: 29

Arm Holdings plc (NASDAQ:ARM) is a British semiconductor design firm whose design rules are used in products made by QUALCOMM, Samsung, and others. Speaking of Arm Holdings plc (NASDAQ:ARM) and Goldman Sachs, the bank was out with a fresh note for the stock in June 2024. This saw Goldman raise Arm Holdings plc (NASDAQ:ARM)'s share price target to $143 from $110 and keep a Buy rating for the shares. The bank explained that edge data center computing is well suited to Arm Holdings plc (NASDAQ:ARM)'s processor designs, and through its fiscal year 2027, the firm should achieve a 24% compounded annual growth rate for its revenue and a 30% growth rate for its EPS.

Looking at these growth rates, Arm Holdings plc (NASDAQ:ARM)'s forward P/E of a whopping 103.09 is unsurprising. This is nearly 5x the S&P's 21, and hints at expectations of an explosive growth in the future. Here's what Bireme Capital had to say for Arm Holdings plc (NASDAQ:ARM) in its Q4 2023 investor letter:

Another stock we bet against in the second half of 2023 was ARM Holdings. We nd the valuation to be far too rich at more than 20x sales and 100x FY 2023 operating income. To garner such a large multiple in the public markets, majority owner Softbank seems to have pulled out all the short-term levers at its disposal. From the FT:

"Arm is seeking to raise prices for its chip designs as the SoftBank-owned group aims to boost revenues ahead of a hotly anticipated initial public oering in New York this year. The UK-based group, which designs blueprints for semiconductors found in more than 95 per cent of all smartphones, has recently informed several of its biggest customers of a radical shift to its business model, according to several industry executives and former employees. These people said Arm planned to stop charging chipmakers royalties for using its designs based on a chip’s value and instead charge device makers based on the value of the device. This should mean the company earns several times more for each design it sells, as the average smartphone is vastly more expensive than a chip."

In our view this was a transparent attempt to boost revenue growth ahead of the IPO. This might work as a one-time boost to sales, but it is not sustainable and will anger and alienate customers. ARM’s largest customers increasingly choose to license just the ARM instruction set architecture (ISA) rather than purchase ARM’s o-the-shelf chip designs. They prefer to design their own chips so they can better optimize their hardware with their software, as Apple has done to great effect with its custom silicon. It is hard to imagine ARM getting signicantly more revenue share while their value-add diminishes.

Overall, ARM ranks 6th among the 15 best hardware stocks to buy according to famed investment bank. You can visit the 15 Best Hardware Stocks According To Goldman to see the other hardware stocks. While we acknowledge the potential of ARM as an AI investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ARM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

 

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Disclosure: None. The article was originally published at Insider Monkey.