By Max A. Cherney, Deborah Mary Sophia
SAN FRANCISCO (Reuters) -Chip designer Arm Holdings forecast on Wednesday that sales will be in line with Wall Street targets, leading to a 4.5% drop in shares, which some analysts attribute to dashed hopes for a stronger AI-powered growth.
Bets that Arm, which licenses its designs, will benefit from a wave of AI computing have more than doubled the chip designer’s stock price since its IPO last September, giving it a market value of about $144 billion. However, the prediction fell short of the expectations of companies like AMD and Nvidia that directly design AI chips.
“Arm has done a good job of associating itself with some of these AI semiconductor trends and the challenge is that because they’ve done that, they’ve raised expectations that may not yet be fully met,” said Bob O’Donnell, president . and principal analyst at TECHnalysis Research. “They are still a few steps away from the final chips,” he added.
Arm’s results on Wednesday beat second-quarter revenue and profit expectations, partly because customers like Apple are using a more profitable version of its next-generation technology.
For the current fiscal third quarter, however, Arm expects revenue between $920 million and $970 million, with a midpoint of $945 million, compared to an average analyst estimate of $944.3 million, according to LSEG data.
The company said it expects fiscal third-quarter earnings of between 32 and 36 cents per share. Analysts had expected third-quarter earnings of 34 cents per share.
“Investors want to see the current AI explosion in the results,” said Kinngai Chan, senior research analyst at Summit Insights Group.
“This quarter is all about validating the strategies we’ve been talking about,” CEO Rene Haas told Reuters in an interview. “We have some real proof points.”
Arm generates revenue from licensing fees for its chip designs and collects a royalty for each chip sold using its technology. The company is in the midst of rolling out its v9 architecture, which is expected to bring higher royalty payments.
Arm’s designs are the basis for almost every smartphone in the world, and the company has tried to make headway in data centers and other markets. It has developed a number of pre-built designs that help customers build chips faster and has doubled the number of pre-built design licenses this fiscal year, the company said.
Haas said the company has signed up its first smartphone chip customer for its off-the-shelf blueprints. Arm has previously sold these designs to server chip designers.
Arm’s second-quarter revenue rose 5% to $844 million, compared to analyst estimates of $808.4 million.
The British chip designer reported a profit of 30 cents per share for the second quarter, adjusted for, among other things, share-based compensation. Analysts had expected earnings of 26 cents per share.
The v9 technology represented 25% of Arm’s revenue for the second fiscal quarter, and its application to smartphones contributed to the company’s revenue growth. Apple is one such customer and the latest iPhone 16 series designs feature v9 technology.
“We are quite optimistic about the growth rates for mobile, including Apple,” said CEO Haas.
Unlike previous versions of the designs, the company has structured deals for the v9 technology to allow Arm to increase prices over time, and in some cases annually, Haas said. The ability to increase prices for its new technology is crucial to the company’s longer-term growth strategy.
According to research by TD Cowen, chips with Arm technology generate $200 billion in revenue annually for the many chipmakers that sell them.
Arm has benefited from investor optimism that it will be helped by the artificial intelligence boom. The shares recently traded at about 70 times expected earnings, compared with about 33 times earnings for heavyweight chipmaker Nvidia, according to LSEG data.
The chips based on the company’s blueprints are included in Nvidia’s upcoming Blackwell AI hardware.
Shares of mobile chip designer Qualcomm rose 11% in after-hours trading on Wednesday after the company issued a forecast that beat expectations. Qualcomm uses Arm technology in its chips. The two companies are involved in a lawsuit surrounding a licensing dispute that is expected to go to trial in December.
(Max A. Cherney in San Francisco and Deborah Sophia in Bengaluru Editing by Sayantani Ghosh, Peter Henderson and Matthew Lewis)
