Interactive Investor

Sellers swamp Arm Holdings after results miss

The UK tech company trading on America’s hot tech market appeared to be recovering from last month’s AI sell-off, but latest results have disappointed. Graeme Evans has the detail.

9th May 2024 13:15

by Graeme Evans from interactive investor

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Arm Holdings logo is displayed on a smartphone screen Getty

The AI-fuelled excitement around Nasdaq newcomer ARM Holdings ADR (NASDAQ:ARM) cooled a little today after the chip designer’s year-ahead forecast underwhelmed Wall Street investors.

In sharp contrast to the 50% jump following February’s results, Arm shares fell 8% in dealings after the release of last night’s figures for the fourth quarter and year to 31 March.

The reversal came despite more strong results, including record royalty revenue amid the strong adoption of Arm’s v9 chip designs in the smartphone, server and automotive markets.

Revenue from licensing was driven by multiple high-value agreements and increased demand for Arm’s power-efficient technology for AI in data centres and edge computing.

The company said: “We believe these fundamental trends will continue and we expect next quarter to also deliver strong year-over-year growth in revenue and profits.”

Its guidance for the 2025 financial year showed revenue of between $3.8 billion and $4.1 billion (£3 billion-£3.3 billion) and earnings per share in the region of $1.45-$1.65.

While a big jump on 2024’s respective out-turns of $3.2 billion (£2.6 billion) and $1.27 a share, the figures only caught Wall Street’s consensus forecasts at the top end of the range.

The shares stood at $106 prior to the results release, having doubled in value from September’s starting price of $51 a share and the $48 seen in late October. In after-hours dealings they fell below $96.

Arm Holdings performance chart May

Source: TradingView. Past performance is not a guide to future performance.

February’s big advance, when Arm said demand for new technology “driven by all things AI” had boosted licensing revenues, took the shares as high as $164.

However, Morningstar analysts wrote a month later that Arm’s valuation of about 90 times earnings was being propelled by an overstated AI narrative on Wall Street.

It said: “While Arm is executing well and is an AI beneficiary, we believe its AI story is ancillary, and we do not expect an earnings inflection that is anywhere close to that of NVIDIA Corp (NASDAQ:NVDA).”

Morningstar said the share price failed to account for Arm's need to continue investing in R&D and also put too-high expectations on growth and margins.

Despite last night’s setback, the latest quarterly figures showed strong tailwinds heading into the 2025 financial year after Arm topped $3 billion in annual revenue for the first time.

Revenue for the most recent quarter rose 47% to $928 million, better than guidance of $850-$900 million as Arm’s V9 technology contributed around 20% of royalty revenue compared with 15% in the previous quarter.

Chief executive Rene Haas told investors that AI had been driving increased demand for Arm-based technology across all end markets.

He added that all AI software models, such as OpenAI’s ChatGPT and Meta Platforms Inc Class A (NASDAQ:META)’ Llama, rely and run on the Arm compute platform. “As these models become larger and smarter, their requirements for more compute with greater power efficiency can only be realised through Arm."

Morgan Stanley last night retained its equal weight recommendation and $107 price target on the stock, despite the weaker than hoped-for 2025 guidance.

The bank’s analysts said: “We expect Arm to continue to outperform expectations through next year, given a broad range of drivers.”

Arm’s strong Nasdaq debut evoked memories of its first stock market listing three decades earlier, when digital mobile phones, set-top boxes and Bluetooth created the initial excitement.

That listing took place in both London and on Nasdaq in April 1998, eight years after Arm was created as a joint venture between Acorn Computers, Apple and VLSI Technology.

Japan’s SoftBank, which bought Arm for £24 billion in 2016, chose New York for September’s return when the Cambridge-based company was valued at $54.5 billion (£43.3 billion).

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