FX168 Financial Reports (North America) - Arm Holdings (ARM), a chip design company, forecasts revenue in line with Wall Street targets, causing its stock price to fall 5% in trading, with some analysts attributing this to the dashed hopes for stronger growth driven by artificial intelligence.
Since its initial public offering in September last year, there has been a bet that Arm will benefit from the surge in artificial intelligence computing, leading to more than a doubling of its stock price, with a market cap of approximately $144 billion. However, the company's forecast on Wednesday fell short of the expectations set by companies like AMD and Nvidia, which directly design AI chips.
"Arm has done well in connecting itself with some AI semiconductor trends, but the challenge lies in the fact that by doing so, they have created expectations that may not have been fully realized," said TECHnalysis Research President and Chief Analyst Bob O'Donnell. "They are steps away from the final chip development," he added.
On Wednesday, Arm's performance exceeded revenue and profit expectations for the second quarter, partly because customers like Apple are using its higher-margin versions of next-generation technologies.
However, based on data from the London Stock Exchange, for the current third quarter, Arm forecasts revenue to be between $0.92 billion and $0.97 billion, with a midpoint of $0.945 billion, while analysts' average expectation is $0.9443 billion.
The company expects earnings per share in the range of 32 cents to 36 cents for the third quarter, while analysts are expecting earnings per share of 34 cents.
"Investors are expecting to see the current AI frenzy reflected in their performance," said Summit Insights Group Senior Research Analyst Kinngai Chan.
"This quarter will validate what we have been talking about strategically," said CEO Rene Haas. "We have some real evidence."
Arm's revenue comes from licensing fees for its chip designs, and royalties for each chip using its technology. The company is introducing its v9 architecture, which is expected to generate higher royalties.
Arm's designs support almost every smart phone globally, and the company is also seeking progress in datacenters and other markets. The company has developed many prefabricated designs, enabling customers to manufacture chips faster, with the number of prefabricated design licenses doubling this fiscal year.
Haas stated that the company has signed a contract with its first smart phone chip customer, providing them with prefabricated blueprints. Arm had previously sold these designs to server chip designers.
Arm's second-quarter revenue increased by 5% to $0.844 billion, while analysts expected $0.8084 billion.
The UK chip designer announced second-quarter earnings per share of 30 cents, adjusted for stock compensation. Analysts expected earnings per share of 26 cents.
v9 technology accounted for 25% of Arm's second-quarter revenue, with its application in smart phones driving revenue growth. Apple (AAPL) is one such customer, with its latest iPhone 16 series design incorporating v9 technology.
"We are very optimistic about the growth rate of the mobile industry, including Apple," CEO Haas said.
Haas stated that unlike previous versions of designs, the company has set up trades for v9 technology to allow Arm to increase prices over time, with the ability to raise prices annually in some cases. The ability to raise prices on new technologies is crucial to the company's long-term growth strategy.
According to TD Cowen's research, chips using Arm technology generate $200 billion in revenue annually for the many chip manufacturers selling them.
Arm benefits from investor optimism, as they believe the prosperity of artificial intelligence will help it. According to the London Stock Exchange data, the company's recent PE ratio is about 70 times the expected earnings, while heavyweight chip manufacturer Nvidia (NVDA) has a PE ratio of about 33 times.
Chips based on the company's blueprint are included in Nvidia's upcoming Blackwell AI hardware.
Qualcomm (QCOM) stock price surged more than 6% in early post-market trading on Thursday, after this mobile chip design company released better-than-expected forecasts on Wednesday. Qualcomm uses Arm technology in its chips. The two companies are involved in a licensing dispute lawsuit scheduled for trial in December.
