Why ARM Holdings Stock Could Finally Be Worth Buying

• ARM Holdings plc (ADR) (NASDAQ: ARMH) stock has declined close to 16 percent over the last six months.
• Macquarie’s Deepon Nag has initiated coverage of ARM Holdings with an Outperform rating and price target of $54.
• Nag believes that the recent pullback in the stock offers an attractive entry point for the “thematic share gainer” in semis.

According to the Macquarie report, the company’s business model has more in common with open-source software firms than with the typical semiconductor company, given that ARM Holdings licenses its core IP at comparatively low prices and then “charges for more feature support and design complexity.”

This has led to an increasing number of tech companies investing in substantial resources in the company’s ecosystem, which Nag believes “has created “lock-in” and pricing power for ARM in multiple markets.”

“We see a similar dynamic playing out in numerous other markets as ARM continues to gain both client and developer share,” the report stated.

In addition, Nag expects the smartphone market to continue to drive a large part of ARM Holdings’ growth in the near future, with the company being able to grow its smartphone royalty revenue at more than 15 percent during CY16.

This growth is expected to be driven by the “increasing adoption of new architecture, higher attach rates for graphics, and increased usage of ARM physical IP.”

Also, Nag expects growth in the company’s non-smartphone categories to accelerate going forward, as ARM Holdings “drives higher-value technologies into embedded opportunities” and gains share of the data center applications market.