Arm Stock Falls 11% on Tepid AI Outlook

On Wednesday, Arm’s conservative sales prediction caused a stock selloff as investors were concerned that AI computing spending would provide slower returns than Nvidia

The company’s market value is expected to decrease by approximately $20 billion if the losses persist on Thursday, as Arm Holdings’ shares declined by 11% after hours.

They had increased by over 90% this year and closed at an 8.4% gain on Wednesday.

AI processors, including market leaders Nvidia and Advanced Micro Devices, have significantly benefited chipmakers. However, Arm does not perceive an immediate advantage from designs specifically designed for generative AI.

This is because the company generates revenue from licensing fees for semiconductor designs and receives a royalty for each processor sold that incorporates its technology.

Arm CEO Rene Haas stated during a conference call following the report that the windfall from designs it licensed this year may only be realized for a while, with AI server processors typically taking four years to develop.

“The way to think about all this increased licensing activity is an excellent predictor of future royalty growth,” according to Haas.
Arm is gaining from a design in specific Nvidia H100 AI chip variants.

However, it will generate even more revenue from the upcoming Blackwell processor family from Nvidia, which it has already begun distributing to customers in the form of samples.

On Wednesday, Nvidia experienced a nearly 13% increase in value, as investors anticipate that its premium processors will continue to be in high demand following Microsoft’s announcement of a substantial rise in AI expenditures. AMD’s shares also increased following the company’s 2024 AI chip sales forecast revision.

The PHLX chip index experienced its most significant daily gain since 2022, which was 7%, due to these gains.
Additionally, Qualcomm, a chipmaker, anticipated its fourth-quarter revenue surpassing Wall Street projections, citing the necessity for additional smartphone processors undergoing AI upgrades.

According to LSEG data, Arm anticipates $780 million to $830 million for the current fiscal second quarter, which is lower than the average analyst estimate of $804.1 million.

“Arm Holdings’ cautious (lukewarm) full-year forecast has dampened spirits despite their impressive earnings beat,” stated Michael Schulman, chief investment officer of Running Point Capital.

“Arm is still benefiting from the artificial intelligence spending explosion, but weakness in other markets, possibly from inventory gluts, has caused management to temper lofty expectations.”

Nevertheless, it reported a 39% increase in first-quarter revenue, reaching $939 million, surpassing the analysts’ forecast of $902.7 million. In an interview with Reuters Chief Financial Officer Jason Child, it was stated that the company’s revenue increase was primarily due to a “handful” of substantial licensing agreements that were signed. However, his royalty revenue was impacted by several poor-end markets.

AI INCOMING

The significant demand for the semiconductors required to power AI applications stimulated licensing agreements. The child stated, “We are witnessing a greater investment in AI than we did 90 days ago.”

Arm has initiated the sale of virtually pre-built designs, enabling customers to produce chips more rapidly, following its IPO last year. Those agreements are profitable during the initial stages; however, Arm is expected to earn more royalties once the consumers have shipped their products, which could take several months or years.

Child stated that Arm has seven such customers and will receive royalties from them in the fourth quarter of this year. However, “next year, it will be significant.”

According to Child, the company has also experienced an increase in revenue due to consumers transitioning to its most recent design architecture, Arm v9, which now serves as 50% of smartphone revenue.

Revenue from China decreased to approximately 13% of total sales, a significant decrease from the 20% or more it typically generates every quarter.

Royalties in China experienced a 114% increase, while its licensing business experienced a 68% decline during the quarter. The substantial increase in Chinese royalties indicates that the number of handsets that utilize processors manufactured by Qualcomm and Apple has decreased.

Arm has endeavored to establish a presence in data centers and other sectors, and its designs are utilized in nearly every smartphone worldwide.