William Blair Initiates Coverage of Arm and Broadcom Stocks

William Blair Initiates Coverage of Arm and Broadcom

William Blair has started its research coverage on Arm Holdings ADR (NASDAQ: ARM), providing an Outperform rating. The analysts expressed confidence in the company's potential for significant growth in both earnings per share (EPS) and stock price in the coming years.

Growth Expectations for Arm

The analysts identified key growth drivers for Arm, including:

Higher Average Selling Prices

Firstly, Arm is expected to see higher Average Selling Prices (ASPs) due to better monetization strategies and enhancing the value of its intellectual property.

Market Share Gains

Secondly, the company is making strides in emerging markets, particularly the data center sector, which is pivotal to its growth trajectory.

AI Demand

Another contributing factor is the surge in demand for computing capabilities driven by artificial intelligence, presenting Arm with a lucrative opportunity.

Mobile and PC Upgrade Cycles

Moreover, there is an anticipated upgrade cycle in mobile and PC devices that will benefit Arm's business.

Valuation Insights

While Arm's stock is currently trading at a premium compared to its peers, the analysts at William Blair believe this is justified by the company’s robust growth outlook, particularly evident in forecasts for 2026 and 2027.

According to their discounted cash flow (DCF) analysis, Arm's stock holds an impressive upside potential of around 35%, supported by continual revenue growth and improving profitability over the next decade. The company's substantial majority ownership by SoftBank is a notable factor in Arm's stock scarcity, as CEO Masayoshi Son's reluctance to sell shares adds to this value.

Arm’s Position in the Data Center Market

Arm is also positioning itself strongly in the data center market. Leading technology firms such as Nvidia, Microsoft, Google, and Amazon are now developing their own Arm-based processors. This shift aligns with the increasing demand for AI computing, suggesting that Arm is well-suited for significant expansion as data centers evolve and adopt these innovative solutions.

Broadcom's Strategic Expansion

In addition to Arm, William Blair also gave an Outperform rating to Broadcom (NASDAQ: AVGO), recognizing the company's strategic efforts to expand into the software sector, which will help absorb fluctuations in the semiconductor market.

AI-Driven Demand

Broadcom is positioned for steady growth, with AI-driven requirements in networking and custom chip markets highlighted as significant drivers of this momentum. Additionally, the company is transitioning to a subscription-based model for its VMware offerings, increasing revenue stability.

VMware Subscription Growth

Remarkably, about two-thirds of VMware's customers have shifted to subscription models, a sharp increase from only 30% before the acquisition, showing a trend towards consistent revenue generation.

Valuation of Broadcom

Furthermore, the analysts note that Broadcom's stock is currently trading at a price-to-earnings (P/E) ratio of 26x and an enterprise value to free cash flow ratio of 22x based on their 2025 estimates, which is slightly below the median of its peer group. This presents potential for further expansion in stock valuation.

Analysts forecast that as the sustainability of growth in networking, customer AI chips, and software becomes clearer, there is significant room for Broadcom's multiple expansion. They labeled Broadcom as an 'execution machine,' increasing the chances for upside in earnings.

In conclusion, both Arm and Broadcom appear to be positioned advantageously for strong growth driven by technological advancements and market demand. The current ratings and insights from William Blair indicate promising futures for both companies, showcasing their critical roles in the expanding tech landscape.

Frequently Asked Questions

What is the significance of William Blair’s ratings on Arm and Broadcom?

William Blair’s Outperform ratings suggest that both Arm and Broadcom are expected to perform well in the stock market in the near future, based on strong growth prospects.

What factors are driving Arm’s growth according to analysts?

Arm's growth is driven by increased Average Selling Prices, market share gains in data centers, rising AI demand, and a new upgrade cycle in mobile and PC devices.

How is Broadcom adapting to market changes?

Broadcom is strategically expanding into software to stabilize revenues against the cyclical nature of the semiconductor market, focusing on AI-driven demands.

What recent changes have occurred in VMware's customer subscriptions?

Approximately two-thirds of VMware's customers have switched to subscription models, a notable increase from previous years, contributing to more predictable revenue streams.

Why are analysts optimistic about the valuation of Arm and Broadcom?

Analysts believe both companies have significant upside potential based on their growth strategies, market positions, and anticipated demand, reflected in their discounted cash flow analyses.

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