ARM Meeting Expectations May Not Be Enough

After last quarter's earnings results, the British chip designer ARM gained more traction, but simply meeting expectations may not be enough to repeat the last growth spurt.

A Shot in the ARM

ARM's stock struggled after its much-anticipated September IPO last year. But this changed when third-quarter earnings dropped in early February, causing the share price to soar over 60% in just one day. Since then, it has pulled back and is down over 30% from its peak during the last earnings season. The prior earnings news was naturally dominated by demand for AI, so the key question is whether the stock can pull off similar gains this reporting period, given AI remains at the top of investor interest.

For the upcoming Q4 fiscal earnings, analysts expect ARM to report a 3.4% sequential increase in the bottom line, with an EPS of $0.30. Revenues are forecast to see a similar trend, with estimates averaging $885 million, up 7.4% from Q3. This would be slightly above the company's own guidance range of $850-900 million for the period. Despite short-term growth sluggishness compared to technology peers, management says ARM's long-term EPS growth rate is at 47%.

Focus and Future

While the Cambridge-based chip designer has attracted notable investor interest in AI, there is uncertainty around its revenue drivers, particularly in light of Apple's disappointing results last week. ARM focuses on smartphone chips, which could indeed see increased demand from rising semiconductor needs. However, this market differs from GPUs, which power AI systems and fueled Nvidia's growth. Despite recent moves to include AI features in phones, the smartphone market showed weakness early this year.

Royalties from chip sales comprise 57% of Arm's revenue compared to 43% from licensing, relying primarily on smartphone volumes. Major customers like Qualcomm and Apple target this market. Though Apple announced a recent plan to develop AI chips for data centres, potentially introducing a new opportunity for ARM. However, its involvement remains unclear during the overnight announcement. Given AI's influence on ARM's share prices, investors will watch for executive comments on what the company will be doing to expand into the space.

ARM in Flag Pattern

ARM remains within its medium-term flag range. Unless the stock finds support at the lower boundary recently bouncing off, further declines are possible, which could close the gap left in February at approximately $77. Regaining $115 may signal a change in momentum, allowing prices to move higher towards $130 and exit the downtrend. Alternatively, a break below $95 will increase the likelihood of testing sub-$85 levels.

Source: SpreadEx / ARM

Key Takeaways

ARM's stock struggled after its IPO but gained over 60% after Q3 earnings due to demand for AI. For Q4, analysts expect a 3.4% rise in EPS to $0.30 and a 7.4% increase in revenues to $885 million. However, weakness in the smartphone market has increased uncertainty around ARM's revenue drivers. Investors will seek clarity on ARM's plans to expand into the growing AI market.