Arm Holdings Misses Revenue Forecast, Shares Fall 7%

Arm Holdings, the UK chip designer, disappointed investors on Wednesday as it provided a full-year revenue forecast that fell short of expectations. The company had experienced a surge in its shares following its IPO last September, driven by optimism surrounding artificial intelligence (AI).

Following the release of the forecast, Arm's shares dropped approximately 7% in after-hours trading. For the current fiscal first quarter, the company projected revenue ranging from $875 million to $925 million, with a midpoint of $900 million. This forecast exceeded the average analyst estimate of $857.5 million, according to LSEG data.

Arm also revealed its expectations for full-year revenue, estimating it to be between $3.8 billion and $4.1 billion, with a midpoint of $3.95 billion. Despite falling slightly short of the consensus estimate of $3.99 billion, Arm's finance chief, Jason Child, emphasized the importance of setting targets based on the firm's high confidence in delivery.

Child acknowledged the challenges of predicting timing for some licensing deals, which can be "hard to pin down." This uncertainty leads the company to issue a guidance range. Arm's fourth-quarter revenue, which rose by 47% to $928 million, surpassed analyst estimates of $875.6 million.

Arm generates revenue through licensing fees for its semiconductor designs and royalties earned for each chip sold that incorporates its technology. The company's designs are widely utilized in smartphones worldwide, and it has also sought to expand into data centers and other markets. TD Cowen's research indicates that chips utilizing Arm technology generate approximately $200 billion in annual revenue.

In the fourth quarter, Arm's licensing business experienced remarkable growth, reaching $414 million, a 60% increase from the same period the previous year. The royalty segment also demonstrated strong performance, jumping by 37% to $514 million. This growth was partially attributed to four major licensing agreements that Arm secured during the quarter.

Arm's shares have doubled in price since its IPO, fueled by speculations that it will benefit greatly from the booming AI computing market. With a market value of around $110 billion, Arm's shares currently trade at nearly 70 times expected earnings, while heavyweight chipmaker Nvidia's shares trade at 35 times earnings, according to LSEG data.

Despite Arm's significant presence in chips powering AI applications, its revenue and profit have not experienced the same level of impact as Nvidia's. Following the release of Arm's forecast, Nvidia's shares dipped 0.5% in extended trading.

The chip industry continues to navigate the evolving landscape of AI and its potential applications, and Arm will need to strategize accordingly to capitalize on this promising market.