Arm Holdings plc (ARM) experienced a significant selloff in its stock on Wednesday, following a conservative revenue forecast that raised concerns among investors about the pace of returns from the burgeoning AI computing sector. The company’s shares fell by 11% in pre-market trading on Thursday, positioning Arm to potentially lose around $20 billion in market value if the declines persist into regular trading hours. Despite this setback, Arm’s stock had risen by over 90% this year prior to the decline and had closed up by 8.4% on Wednesday.
Arm Holdings, known for its semiconductor designs, does not anticipate immediate benefits from the surge in AI computing, unlike competitors such as Nvidia (NVDA) and Advanced Micro Devices (AMD), which have seen substantial gains from AI processors. Arm generates revenue primarily through licensing fees and royalties from chips that use its technology. However, the financial rewards from these designs can take several years to materialize, with AI server chips typically taking around four years, according to CEO Rene Haas.
“The increase in licensing activity is a strong indicator of future royalty growth,” Haas explained during a conference call following the earnings report.
Arm’s designs are currently featured in some versions of Nvidia’s H100 AI chips, but the company expects to see more substantial revenue from Nvidia’s upcoming Blackwell chip family, with samples already being distributed to customers.
Meanwhile, Nvidia’s stock surged nearly 13% on Wednesday, fueled by expectations of continued high demand for its advanced processors following a major increase in AI spending reported by Microsoft (MSFT). AMD also saw a rise in its shares after the company raised its 2024 forecast for AI chip sales. These gains contributed to a 7% rise in the PHLX chip index, marking its largest daily increase since 2022.
Qualcomm (QCOM) also provided a positive outlook, forecasting fourth-quarter revenue above Wall Street estimates due to anticipated increased demand for AI-enhanced smartphone chips.
For its fiscal second quarter, Arm projected revenue between $780 million and $830 million, falling short of the average analyst estimate of $804.1 million. Despite reporting a 39% increase in first-quarter revenue to $939 million—surpassing analyst predictions—the company’s cautious full-year forecast has dampened investor sentiment. Michael Schulman, chief investment officer at Running Point Capital, noted that while Arm benefits from the AI spending boom, weak performance in other markets and potential inventory issues have led management to temper expectations.
The company’s first-quarter revenue boost was attributed to several major licensing agreements, although royalty revenue was impacted by sluggish end markets, as noted by Chief Financial Officer Jason Child.
Arm has capitalized on the growing investment in AI, with licensing deals reflecting increased demand for AI-related silicon. “We’re seeing more investment in AI than we did just 90 days ago,” Child remarked.
Since its IPO last year, Arm has introduced nearly pre-built chip designs to accelerate production, which, while initially lucrative, will generate more substantial royalties once customer products are shipped. Arm has seven such customers, with meaningful royalty income expected next year.
Additionally, revenue from Arm’s latest design architecture, Arm v9, now constitutes 50% of its smartphone revenue. However, revenue from China has dropped to around 13% of total sales, down from over 20% in previous quarters. Although royalties from China increased by 114%, the licensing business there decreased by 68%, reflecting fewer handsets using chips from companies like Qualcomm and Apple.
Arm’s designs continue to power a significant portion of global smartphones, and the company is also seeking to expand its presence in data centers and other markets.
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