Arm Holdings Earnings Preview: AI Boom and Pricing Strategy in Focus

Arm Holdings is set to report its fiscal third-quarter 2024 earnings after the market close, with analysts expecting revenue of $949 million and adjusted earnings per share (EPS) of $0.34. This represents a solid year-over-year increase from $824 million in revenue and $0.29 in EPS a year ago. Looking ahead, analysts forecast fourth-quarter revenue of $1.22 billion and EPS of $0.52, reflecting continued strength in AI and server demand.

One of the most important aspects of this earnings report will be Arm’s licensing and royalty revenue. The company has been able to increase its royalty rates through its Armv9 architecture, which commands higher pricing than its predecessor, Armv8. Additionally, its expansion into cloud and AI-driven chip designs has been a key revenue driver, with companies like Microsoft and Nvidia designing chips with over 100 cores using Arm’s blueprints. The increasing adoption of AI workloads, particularly in cloud and data centers, is expected to support strong growth.

Another important factor is Arm’s pricing strategy, which has been a point of discussion recently. Reports suggest the company is planning price hikes of up to 300% and is even considering developing its own chips to compete with some of its major customers. This aggressive pricing move, while potentially beneficial for margins, could also lead to pushback from key partners like Apple, Qualcomm, and Microsoft. Investors will be eager for details on how these changes could impact future revenue growth.

Heading into earnings, sentiment around Arm is generally positive, though with some caution. KeyBanc analyst John Vinh reaffirmed an Overweight rating with a $195 price target, stating that he expects Arm to deliver in-line results and guidance, driven by continued strength in AI and cloud servers. Other analysts, including those from Barclays, Goldman Sachs, and Wells Fargo, have also raised price targets, citing the growing demand for Arm-based AI chips and cloud infrastructure.

That said, there are some risks. While demand for AI remains strong, the impact of DeepSeek-R1, an open-source AI model from China, could reduce the need for high-end AI chips by enabling AI models to operate on a reduced hardware loadout. If this becomes a trend, it could have implications for semiconductor demand, including Arm’s licensing revenue.

A major talking point during the earnings call will be Arm’s involvement in the Stargate project, a massive AI-focused initiative that has received significant backing from the new administration. CEO Rene Haas has stated that Arm’s role in Stargate will come through Nvidia chips, suggesting a deepening relationship between the two companies. Additionally, Ampere, a cloud-focused semiconductor company, is likely to be involved, which could further expand Arm’s data center presence.

Investors will be looking for financial details on the project, as Arm’s management has noted they are still working out the specifics. Given the potential scale of Stargate, any confirmation of meaningful revenue contributions could be a bullish catalyst.

ARM Price Action

Arm has been on a massive rally, gaining 128% over the past 12 months and 29.3% in January alone—its best monthly performance since June. The stock has traded as high as $188.75 and as low as $71.60 over the past year, reflecting high volatility. Ahead of the report, shares soared over 10% as semiconductor stocks rallied on AI investment news, and continued buying interest pushed the stock to $175.50.

Despite the rally, implied volatility suggests an expected post-earnings move of +/- 9.7%, indicating that traders are pricing in a sizable swing in either direction. Analysts remain bullish overall, with 18 Buy ratings, 6 Hold ratings, and 2 Sell ratings, and a consensus price target of $152.09—below current levels, suggesting that expectations may already be baked into the price.

Arm’s earnings report will be a key moment for investors looking to gauge the sustainability of its AI-driven growth story. While expectations are high for strong licensing revenue and royalty growth, investors will also be focused on pricing strategies, AI adoption, and the impact of the Stargate project. With shares already surging, the company will need to deliver strong results and forward guidance to justify its valuation. A solid beat and optimistic commentary on AI and cloud adoption could push the stock toward its January highs, while any sign of a slowdown could trigger profit-taking.

Qualcomm Settlement

On December 23, Qualcomm (QCOM) secured a legal victory when a jury ruled that its license to use Arm Holdings' (ARM) chip architecture for PCs and laptops remains valid, allowing it to continue selling chips in that market without incurring higher royalty fees. The ruling alleviates concerns about margin pressure on QCOM’s emerging PC business, a crucial part of its revenue diversification strategy as AI-driven computing gains momentum. However, the legal battle isn’t over—while the jury found that QCOM did not breach its contract, it deadlocked on whether Nuvia, a CPU design firm QCOM acquired in 2021, violated its licensing agreement with ARM, leaving the door open for a retrial in 2025. Despite this uncertainty, QCOM remains bullish on its PC ambitions, projecting $4 billion in revenue from the segment by FY29 and citing strong momentum for its Snapdragon X chipset. While the ruling is a win for QCOM, lingering legal risks and competitive threats, including Apple’s (AAPL) expected entry into the modem chip market, continue to weigh on its long-term outlook.

Arm Holdings Q2 Recap- AI Demand Fuels Growth

Arm Holdings posted another solid quarter, continuing its streak of surpassing earnings and revenue expectations since its IPO last year. The company reported adjusted earnings per share (EPS) of $0.30 on revenue of $844 million, marking a 4.7% year-over-year increase. A key driver behind the strong results was the surging demand for artificial intelligence (AI) applications, which has expanded the need for Arm’s platform. This was reflected in a 23% year-over-year jump in royalty revenue to $514 million, underscoring how AI adoption is fueling growth in the company’s core markets.

A critical component of Arm’s revenue expansion was the ongoing recovery in the smartphone market, but more importantly, the increasing number of CPUs integrated into chips based on Arm’s latest v9 architecture. While smartphone unit growth was modest at just 4% for the quarter, royalty revenue from smartphones climbed 40%, demonstrating how higher content per device is boosting Arm’s licensing model. The company also benefited from its technological leadership in AI, with its architecture running on devices from the edge—such as Apple’s iPhones—to the cloud, as seen in NVIDIA’s Grace Blackwell platform. Arm continued to deepen relationships with major tech firms, including Meta (Llama 3.2 optimization), Microsoft (Azure Cobalt virtual machines), and Google (Axion processors), reinforcing its importance in AI innovation.

Despite the strong royalty growth, licensing revenue declined 15% to $330 million. However, this was better than management’s initial expectations of a 25% decline. The company noted steady licensing demand across multiple sectors, which is a positive signal for future royalty growth. Licensing revenue often serves as a forward indicator of royalty revenue, and Arm’s ability to outperform expectations suggests sustained business strength ahead. The company maintained its full-year fiscal 2025 guidance, targeting adjusted EPS of $1.45 to $1.65 and revenue of $3.8 billion to $4.1 billion. Management cited licensing timing as a factor for keeping its outlook unchanged, noting that some major deals in the pipeline could shift revenue recognition across different quarters.

While Arm’s stock has more than doubled year-to-date, it remains about 20% below its all-time highs from July. Some investor caution lingers due to the ongoing inventory correction affecting the semiconductor sector. Additionally, China represents roughly 20% of Arm’s revenue, and concerns over economic uncertainty in the region may be tempering enthusiasm. Nonetheless, the company’s strong position in AI-driven computing and growing adoption of its architecture point to continued growth opportunities ahead.