Arm Holdings (ARM) is set to announce its fiscal second-quarter earnings, with analysts expecting revenue of $810 million and adjusted EPS of $0.26. These estimates reflect steady, albeit moderate, growth and underscore ARM’s ability to capitalize on its royalty and licensing model. A central driver remains the company’s newer Armv9 architecture, which commands double the royalties of its predecessor, Armv8, and has shown significant penetration in mobile and cloud markets. For the full fiscal year 2025, ARM has issued guidance of $3.95 billion in revenue and adjusted EPS of $1.55, indicating a conservative outlook despite AI-driven demand.
ARM’s long-term growth prospects hinge largely on the success of its Armv9 architecture. This chip technology is featured in the upcoming iPhone 16, with Apple leveraging Arm designs to enhance AI capabilities in its latest devices. Furthermore, ARM’s designs are central to custom processors from Microsoft and Nvidia, which are targeted at the data center and AI applications, strengthening ARM’s foothold in high-growth segments. These partnerships, especially within AI-related fields, are expected to significantly boost ARM’s royalty revenues. Analysts are keen to see if ARM can meet its projected 20% year-over-year royalty growth, which hinges on broader Armv9 adoption across both mobile and cloud markets.
The automotive and industrial IoT markets, however, are presenting challenges. Bernstein’s recent downgrade of ARM reflects concerns that these cyclical industries may limit ARM’s royalty growth in the near term. Automotive companies have issued warnings about slowing profits and inventory concerns, particularly as the sector sees a shift from battery-electric vehicles (BEVs) to plug-in hybrid electric vehicles (PHEVs). Similarly, industrial IoT remains sluggish, with companies like Texas Instruments reporting mixed demand across these markets. Although ARM’s royalties from non-mobile applications, including automotive and industrial IoT, remain robust, they are not immune to broader economic headwinds.
ARM’s data center prospects are particularly promising due to growing demand for energy-efficient designs driven by AI. The company’s server processors are making steady gains, although adoption has been gradual. The anticipated launch of NVIDIA’s GB200 processor, which leverages ARM’s low-power architecture, is likely to increase ARM’s market share in data centers, where its architecture is already gaining traction. ARM’s success in capturing additional data center market share will be closely watched, especially given increasing competition from the open-source RISC-V architecture. The potential for ARM to develop AI accelerator IP specifically for data centers could further expand its addressable market.
Analysts have mixed views on ARM’s current valuation, which is substantially higher than the industry average. ARM trades at a forward price-to-earnings (P/E) ratio significantly above its peers, raising concerns about the sustainability of this premium valuation. While ARM's revenue and EPS growth prospects are compelling, particularly given the AI boom, the company’s elevated valuation leaves limited room for error. Some analysts, including KeyBanc’s John Vinh, maintain bullish price targets, emphasizing ARM’s potential for long-term growth in cloud and AI sectors. However, the industry’s cyclical nature, combined with economic uncertainty, may keep ARM’s valuation in check.
The company has been clear about managing expectations in light of the macroeconomic headwinds, especially as it continues to work through multi-year commitments. This measured outlook may disappoint some investors hoping for stronger momentum tied to AI trends and robust demand across mobile and cloud. Moving forward, ARM’s execution will be closely scrutinized to determine if it can sustain its high valuation while navigating industry challenges.
Arm Holdings plc reported a strong Q1 performance, with adjusted EPS of $0.40 and revenue of $939 million, reflecting a robust 39.1% year-over-year increase. This growth was driven primarily by a record 72% jump in licensing revenue and a notable 17% rise in royalty revenue, showcasing the continued adoption of its latest Armv9 architecture, which now accounts for a quarter of overall royalty revenue. Strong gains in smartphone royalties, with a 50% year-over-year surge, underscored ARM's royalty potential, particularly as the economic environment stabilizes. Additionally, CEO Rene Haas highlighted the growing importance of ARM's power-efficient platform for AI applications, a factor that could shift demand away from the traditional x86 architecture. Market share gains in the automotive and cloud segments, along with support from Microsoft’s Windows on Arm initiatives, further underscore ARM’s technological strength and potential future revenue streams.
Despite this strong Q1, ARM’s stock declined as investors reacted to the company’s cautious outlook for FY25. ARM chose to maintain its FY25 revenue guidance, even lowering its royalty revenue growth estimate to the low-20% range due to a persistent inventory correction in IoT and networking markets. This cautious stance, alongside ARM’s decision to stop reporting chip shipment volumes, reflects the shift toward lower-volume, higher-value segments, but it also dampened investor expectations. With AI growth underpinning much of ARM's recent success, the market anticipated a more optimistic FY25 forecast. However, ARM’s prudent guidance, tied to adjusted EPS of $1.45-1.65 and revenue of $3.8-4.1 billion, signaled caution amid ongoing challenges in key IoT and networking segments, keeping shares under pressure.
Shares of ARM have coiled in a tight pattern between $135-150 ahead of the report. We have seen strong reports from AI-related names rewarded handsomely this week (ALAB, PLTR, etc). So a good report will give ARM a chance to break above the $165 area. However, investors need to be aware that ARM tends to be conservative with its outlook, which could act as a headwind this afternoon.