Chip Designer Arm Holdings Falls Short of Expectations
Despite beating revenue and profit expectations for the second quarter, Arm Holdings’ shares plummeted 4.5% due to unmet expectations for stronger growth fueled by artificial intelligence.
The AI Boom: A Double-Edged Sword
Arm’s association with AI semiconductor trends has more than doubled its share price since its initial public offering last September, giving it a market value of approximately $144 billion. However, this has created lofty expectations that the company has yet to meet. As Bob O’Donnell, president and chief analyst at TECHnalysis Research, notes, “Arm’s several steps removed from the final chips,” making it challenging to live up to the hype.
Forecast Falls Short
For the current fiscal third quarter, Arm forecast revenue between $920 million and $970 million, with a midpoint of $945 million, barely meeting the average analyst estimate of $944.3 million. The company’s expected earnings of between 32 cents and 36 cents per share also fell short of analysts’ expectations of 34 cents a share.
Validating Strategies
Chief Executive Rene Haas remains optimistic, stating, “This quarter is all about the validation of the strategies we’ve been talking about. We’ve got some real proof points.” Arm’s v9 architecture, which is expected to generate higher royalty payments, has seen significant adoption, with 25% of the company’s revenue coming from this technology in the fiscal second quarter.
Diversifying Revenue Streams
Arm’s designs power nearly every smartphone in the world, and the company is making headway in data centers and other markets. Its pre-built designs have enabled customers to build chips more quickly, with the number of pre-built design licenses doubling this fiscal year. The company has also signed up its first smartphone chip customer for its premade blueprints.
Growing Optimism
Despite the disappointment, Arm’s second-quarter revenue rose 5% to $844 million, beating analyst estimates. The adoption of its v9 technology in smartphones, including Apple’s latest iPhone 16 series, has contributed to the company’s revenue growth. CEO Haas remains “pretty optimistic about the growth rates for mobile, including Apple.”
Long-Term Growth Strategy
The ability to increase prices on its new technology is crucial to Arm’s longer-term growth strategy. With chips based on its blueprints generating $200 billion a year of revenue for chipmakers, the company’s future prospects look promising. However, investors will be watching closely to see if Arm can live up to its AI-fueled growth expectations.
Leave a Reply