Will Arm Holdings Taste Better With a Slice of 'Pi'?
Here's an ARM trading idea after British name Raspberry Pi heats up on IPO.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
Arm Holdings' ARM appetite for Pi is paying off, apparently.
Back in 2023, chip designer Arm Holdings acquired a minority stake in Raspberry Pi after working with the smaller company for about 15 years. Raspberry Pi, also a British company, went public last week on the London Stock Exchange. Pi builds relatively affordable single board computers for hobbyists as well as for business customers.
The Raspberry Pi IPO went well, with the shares moving up some 40% in value after trading began. Arm Holdings, which is listed at the Nasdaq, rallied to the tune of 15.6% last week after adding 13.3% the week prior -- even though it's a British name. Hmmm...
ARM-ed With News
This Monday morning, Vivek Arya of Bank of America, who's rated 5 stars by TipRanks, increased his target prices for both Arm Holdings and Micron Technology MU as Arya sees interest in generative artificial intelligence moving toward consumer electronic devices. Arya reiterated "Buy" ratings for both stocks, while increasing his target price for ARM from $150 to $180 and his target for MU from $144 to $170.
In the accompanying note, Arya wrote, "Consumer hardware companies will regardless try to leverage rising consumer interest and growing software ecosystem momentum to drive a faster upgrade cycle. Recall the same trend took place in 4G/5G deployments when devices with advanced hardware preceded emergence of mobile applications such as Instagram META and Uber UBER that emerged later. While 4G/5G ushered the need for better cellular modems/RF, we believe on-device AI will be most beneficial for processor and memory companies."
Earnings Beat
Readers may recall that back in early May, ARM posted fiscal fourth-quarter results, beating Wall Street's expectations for both the top and bottom lines. The company simultaneously took the low ends of the range for current quarter guidance above consensus view for both adjusted earnings per share and revenue.
Arm Holdings also posted a stunning $637 million in free cash flow for that quarter, bringing free cash flow for that full year to $907 million. This was up 50% from the full year prior. In addition, the balance sheet at that time could boast a robust current ratio of 2.79, while bearing no debt-load and unearned revenue of $915 million. In other words, the fundamentals at this time are very strong.
The Breakout... Or Not
Readers will see here that late last week, ARM tried to break out of a roughly five- month long basing period of consolidation. The attempt failed. The stock was up ahead of the opening. That attempt, though not recognized because it happened outside of regular hours, failed as well. Relative strength is in a technically overbought state, while the daily MACD remains postured quite bullishly.
It would not surprise me to see at least one more attempt made for this stock to break out of its base. Should there be a third failure, the gap from early February remains partially filled. I don't even want to think about that. However, with the stock still trading close to pivot, a take and hold of that spot could unleash another sharp move higher on top of the moves just realized.
What that means is that I see a pivot of $164 for ARM. A successful attempt to take that level, could in my opinion create an upside target of $190. A good spot to panic upon failure, would be a loss of that 21-day exponential moving average, currently $135.
Trade Idea (minimal lots)
- Purchase one Aug.16 ARM $165 call for a rough $17.50.
- Sell one Aug. 16 ARM $190 call for a rough $10.50.
- Sell one Aug. 16 ARM $135 put for about $9.
Net credit $2.00
Note: The trader in this case is risking a net $7.00 in an attempt to win back $25 by mid-August. Given that this trader is interested in getting long ARM equity at a discount should the stock fail at this level, in order to take on that discounted equity risk ($135), the trader is being paid $9 up front, which pays for the bull call spread while also adding a small amount of income.
At the time of publication, Guilfoyle had no position in any security mentioned.
