Arm Holdings Forecast Falls Short of AI Hype, Shares Drop 4.5% Despite Revenue Growth

Highlights

• Revenue Projection Disappoints: Arm’s third-quarter revenue forecast aligned with Wall Street’s average estimate but fell short of heightened AI-driven expectations.
• 5% Revenue Growth: Arm reported a 5% increase in second-quarter revenue, surpassing estimates, partly due to demand for its v9 technology used by major clients like Apple.
• AI Optimism Tested: Arm’s shares, which surged post-IPO on AI optimism, faced skepticism as investors recalibrate expectations amid robust competition from Nvidia and AMD.

Arm Holdings (NASDAQ:ARM), the UK-based chip design powerhouse, saw its shares fall by 4.5% after its latest revenue forecast failed to meet some investors' high expectations for stronger, AI-driven growth. Although Arm’s projected third-quarter revenue aligns with Wall Street estimates, the company's anticipated boost from AI has yet to rival the soaring trajectories of AI chip leaders like Nvidia and AMD.

Since its initial public offering in September, Arm’s market value has ballooned to approximately $144 billion as investors bet that the company would capitalize on the burgeoning AI sector. However, Wednesday's projections moderated some of that optimism, especially as Arm's technology primarily powers mobile devices, unlike Nvidia and AMD, whose products directly target AI and high-performance computing markets.

In its second-quarter report, Arm announced a 5% year-over-year revenue increase to $844 million, surpassing analyst expectations of $808.4 million. The company attributed part of this success to strong demand from top-tier clients such as Apple, which integrated Arm’s latest v9 technology into its new iPhone models. Arm’s v9 architecture, which is expected to yield higher royalty fees, contributed to 25% of the company’s revenue in the fiscal second quarter. Chief Executive Rene Haas highlighted that Arm structured its v9 licensing agreements to enable gradual price increases, potentially boosting the company's long-term revenue prospects.

For the upcoming fiscal third quarter, Arm forecasts revenue between $920 million and $970 million, with an expected midpoint of $945 million, slightly above Wall Street's consensus of $944.3 million. Arm’s projected earnings per share (EPS) for the quarter range between 32 cents and 36 cents, close to analysts' 34-cent forecast.

In addition to licensing its designs, Arm collects royalties for each chip that uses its technology, allowing it to remain integral to the global smartphone market and expand into new sectors. The company’s designs power virtually every smartphone worldwide, and it has also made strides into data centers and other high-performance computing areas. To enhance its value proposition, Arm has doubled the number of pre-built design licenses it offers, facilitating faster development timelines for its customers. Recently, it secured its first smartphone customer for its pre-built blueprints, marking a notable expansion in its mobile chip offerings.

Despite Arm’s strong revenue performance, its shares remain under pressure due to high expectations for accelerated AI growth. Analysts note that the company’s business model of licensing designs, rather than manufacturing AI chips, could limit its ability to capitalize on the AI surge in the same way as companies like Nvidia. Arm’s shares are currently trading at approximately 70 times its expected earnings, a premium when compared to Nvidia's valuation of about 33 times earnings.

Still, Arm’s technology plays a significant role in the AI space, with its designs embedded in Nvidia's forthcoming Blackwell AI hardware. Additionally, mobile chip giant Qualcomm, a key user of Arm’s technology, reported a strong earnings forecast, sending its shares up 11% in after-hours trading.