Arm Holdings Q4 Earnings: Strong Results, But a Sell-the-News Reaction

Arm Holdings delivered a strong fiscal Q4 earnings report, surpassing Wall Street expectations on both earnings per share (EPS) and revenue. The company reported adjusted EPS of $0.39, exceeding analysts’ estimates of $0.34. Total revenue rose 19% year-over-year to $983 million, beating expectations of $946.8 million. The company also provided slightly stronger-than-expected guidance for Q4, forecasting revenue between $1.18 billion and $1.28 billion, compared to the consensus estimate of $1.23 billion. Full-year revenue guidance was narrowed to a range of $3.94 billion to $4.04 billion, compared to its prior forecast of $3.8 billion to $4.1 billion. Similarly, adjusted EPS guidance was tightened to $1.56 to $1.64, compared to the previous range of $1.45 to $1.65.

Key Metrics and Revenue Drivers

Arm's earnings were driven by a significant 23% increase in royalty revenue, which reached $580 million, surpassing estimates of $568.4 million. This growth was fueled by the continued adoption of Arm’s v9 architecture, leading to higher content per device. Despite only 4% growth in global smartphone sales, Arm’s royalty revenue from smartphone chips surged 40%, reflecting its dominant position in premium mobile chip design. Licensing and other revenue came in at $403 million, above expectations of $378.6 million. While licensing revenue has been under pressure in recent quarters, the 15% year-over-year decline was better than the expected 25% drop. The company noted that licensing demand across multiple markets remains steady, which is a positive sign for long-term growth.

AI Expansion, Smartphone Recovery, and Market Trends

Several key trends are shaping Arm’s outlook. AI expansion and cloud growth remain strong as the company benefits from AI adoption across multiple sectors, including smartphones, data centers, and IoT. Partnerships with Meta, Microsoft, and Google are reinforcing Arm’s role in next-generation AI workloads. The smartphone market is also showing signs of recovery, with a shift toward higher-end devices using Arm’s latest architectures driving premium royalty revenues. Beyond mobile, Arm continues to expand into automotive, IoT, and data centers, helping diversify its revenue streams. However, with approximately 20% of its revenue tied to China, macroeconomic headwinds in the region remain a potential risk factor.

Stock Action and Investor Reaction

The stock had gained nearly 20% in the past few weeks, rallying from $146 to $174 ahead of the report. However, despite the strong results, shares have dropped over 5% in after-hours trading as investors engage in a "sell-the-news" reaction following the big run-up. While the earnings report reinforced Arm’s long-term growth story, the stock’s recent rally and some lingering uncertainties, such as licensing deal timing and China exposure, led to some near-term profit-taking.

Final Thoughts

Arm Holdings delivered another strong quarter, with better-than-expected revenue, earnings, and royalty growth. The company’s exposure to AI, premium smartphone chips, and cloud computing positions it well for long-term expansion. However, profit-taking pressure is hitting the stock as investors react to its recent rally. Going forward, continued AI adoption and Arm’s penetration into cloud and IoT markets will be key drivers to sustain long-term growth.