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ARM Earnings Preview: An important look at the semiconductor market

AInvestWednesday, Jul 31, 2024 3:08 pm ET
2min read

Arm Holdings plc (ARM) is set to report its Q4 earnings after the market close on July 31. The consensus expectations for this quarter are revenue of approximately $905.53 million and EPS of $0.34. Investors are particularly focused on these results due to ARM's significant role in the semiconductor industry, especially in the context of the current AI boom.

ARM's importance lies in its pervasive presence in the semiconductor market, providing essential processor and semiconductor designs for various applications, from consumer electronics and automobiles to data centers and the Internet of Things. The company's licensing model allows it to benefit from the overall growth of the AI, Data Center, and Edge Computing industries. Key metrics to watch in the upcoming report include the performance of ARM's Armv9 architecture and its impact on royalty and licensing revenues.

In the previous quarter, ARM reported a 47% year-over-year revenue growth, reaching $928 million, driven by the accelerating adoption of its Armv9 architecture. This robust growth is expected to continue, with ARM projecting FY25 revenues between $3.8 billion and $4.1 billion, translating to a 22% year-over-year increase at the midpoint. Investors will be keen to see if this momentum is sustained, especially in the face of a potential slowdown in the Android smartphone market and mixed feedback on ARM-based CPUs.

Despite these strong growth projections, ARM's FY25 guidance has raised some concerns among investors. The company’s shares experienced a significant sell-off due to perceived underwhelming guidance, reflecting skepticism about the sustainability of AI-related demand. Analysts have mixed opinions, with some viewing ARM's elevated PE ratio and potential competition from AMD and Intel as risks, while others highlight ARM's strategic positioning in the emerging Edge AI space as a key growth driver.

The upcoming earnings report will be closely watched for updates on ARM's royalty revenue and potential developments in AI chip technology. Given the broader context of increased investments in AI by major tech companies like Microsoft, Meta, Alphabet, and Amazon, ARM's ability to capitalize on these trends will be critical. Investors will also be looking for any comments on the reported AI chip development and how it positions ARM for future growth in the competitive semiconductor landscape.

Arm Holdings plc (ARM) experienced a turbulent start to the day after its Q4 results, with shares initially dropping over 7% due to underwhelming FY25 guidance. The midpoints of ARM's earnings and revenue projections matched analyst expectations, which disappointed investors given the high demand for AI-related technology. This outlook raised concerns about a potential slowdown in demand for AI products, despite widespread industry excitement over large-language models and Generative AI.

Despite the initial sell-off, investors began to refocus on the positive aspects of ARM's Q4 performance. The company reported significant growth in both royalty and licensing revenues, driven by the adoption of its new Armv9 architecture. Royalty revenue increased by 37% year-over-year, while licensing revenue surged by 60%, reflecting the rapid pace at which companies are upgrading their hardware designs to keep up with AI advancements. This robust revenue growth led to a total Q4 revenue of $928 million, a 47% year-over-year increase, surpassing the forecasted range of $850-900 million.

However, the in-line FY25 guidance remains a point of concern. Despite the upbeat tone from management regarding AI adoption and the extensive use of ARM's architecture by major companies like Google and Microsoft, the guidance did not fully reflect these positive trends. This has led to a sense of caution among investors, who are wary that companies may be slowing their AI investments to focus on monetizing existing infrastructure. As ARM navigates these challenges, its guidance will be closely watched to see if it aligns with the broader industry momentum in AI development.

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