Arm Holdings Slumps 14% in Premarket Trading Despite Q2 Beat

1 ago

Shares of Arm Holdings plc (ARM) plummeted in premarket trading on Thursday, shedding nearly 14% despite reporting better-than-expected fiscal first-quarter results. The British chipmaker's stock faced a sharp decline following the release of its quarterly results after the market closed on Wednesday.

Solid Earnings Overshadowed by Royalty Revenue Concerns
Arm Holdings reported record revenue of $939 million for the fiscal first quarter ended June 30, marking a 39% year-over-year increase and surpassing analyst expectations of $912 million according to Visible Alpha. The company also posted diluted earnings per share of 21 cents, significantly higher than the 10 cents reported in the same quarter last year and above the anticipated 16 cents.

The robust earnings were driven by a substantial 72% increase in licensing and other revenue, which reached $472 million. However, the upbeat results were overshadowed by concerns over royalty revenue, which, although it grew 17% to $67 million, fell short of forecasts. This shortfall was attributed to lower-than-expected sales of chips, which forms a critical part of Arm's business model.

Full-Year Guidance Maintained, but Market Unimpressed
Arm maintained its full-year guidance, which aligns with the consensus estimate, but this did not quell investor concerns. The company projected adjusted earnings per share between 23 cents and 27 cents for the current quarter, in line with previous guidance but below some analyst estimates. Notably, this quarter marked the first time Arm did not raise its outlook, a move that some analysts, including Needham's Charles Shi, interpreted negatively given the stock's high valuation.

Strategic Shift and Reporting Changes
Arm also announced a strategic shift in its reporting practices, deciding not to disclose unit chip shipment data going forward. The company cited the decreasing relevance of this metric as it pivots towards focusing on low-volume, high-value chips. This change reflects Arm's strategy to target higher-margin markets and products, leveraging its Armv9-based chips' penetration to drive future growth.

Market Reaction and Analyst Commentary
Despite a strong revenue and earnings beat, the market reacted negatively, with Arm's shares plummeting over 12% in after-hours trading after an 8% increase during the regular session. The stock, which has surged over 90% year-to-date in 2024, shows some potential for recovery, as indicated by a Relative Strength Index (RSI) of 31.31.

Analysts have mixed reactions to Arm's results and guidance. While the robust licensing revenue growth is a positive sign, the slower-than-expected royalty revenue and unchanged full-year outlook raise concerns about the company's ability to sustain its growth momentum amid a competitive and rapidly evolving semiconductor industry.

Conclusion
Arm Holdings' latest financial results showcase the company's strong performance and strategic focus on high-value products. However, the market's reaction underscores the challenges it faces in meeting high investor expectations and navigating the complexities of the semiconductor market. As Arm continues to adapt its business model and reporting practices, the coming quarters will be crucial in determining whether it can sustain its impressive growth trajectory and regain investor confidence.