ARM shares tumble in after hours as in line report fails to uphold rich valuation
AInvestWednesday, Jul 31, 2024 5:45 pm ET
2min read
ARM --

Arm Holdings plc (ARM) reported strong Q1 results, exceeding both top and bottom-line expectations. The company delivered adjusted EPS of $0.40, surpassing the consensus of $0.34 by $0.06. Total revenue for the quarter was $939 million, significantly higher than the expected $905.4 million. This represents a 39.1% year-over-year increase, showcasing robust growth in both license and royalty revenues.

For Q2, ARM provided guidance in line with expectations, forecasting revenue between $780 million and $830 million, compared to the consensus of $806.2 million. The company also expects adjusted EPS in the range of $0.23 to $0.27, matching the consensus estimate of $0.27. ARM reaffirmed its full-year FY25 guidance, projecting adjusted EPS between $1.45 and $1.65 and revenue between $3.8 billion and $4.1 billion, in line with the analyst estimate of $4 billion.

Shares of ARM are trading down by approximately 15% in after hours. The stock carries a rich valuation at 69x forward earnings. The in line results, Q2 in line guidance, and reaffirmation of the FY25 outlook simply was not good enough for investors. Investors may want to keep the 200-day moving average ($105) on their radar for a potential test.

A key driver behind ARM’s impressive performance was its record license revenue, which reached $472 million, up 72% year-over-year. This surge was due to multiple high-value license agreements as companies committed to using ARM’s power-efficient technology in their future products. Additionally, royalty revenue also showed strong growth, rising 17% year-over-year to $467 million, driven by increased adoption of ARMv9-based chips and higher royalty rates from premium smartphones and advanced automotive applications.

Operating expenses were well managed, with adjusted operating expenses reported at $467 million, below the estimate of $480.3 million. The company's disciplined approach to cost management resulted in a strong adjusted operating income of $448 million, significantly above the expected $396 million. This performance translated into an adjusted operating margin of 47.7%, exceeding the estimate of 43.5%.

ARM's guidance for Q2 suggests continued strong performance, albeit with some caution around operating expenses. The company expects adjusted operating expenses of about $500 million, higher than the estimated $472.7 million, indicating increased investment in R&D and headcount to support its growth initiatives. This strategic investment is expected to sustain ARM's competitive edge and drive long-term value.

The company's FY25 guidance remains optimistic, reaffirming its expectations for adjusted EPS between $1.45 and $1.65 and revenue between $3.8 billion and $4.1 billion. This confidence is underpinned by the ongoing proliferation of AI and the migration of AI workloads from cloud to edge devices, which is expected to drive higher compute demand per device and increase royalty revenue per chip.

Overall, ARM's Q1 performance underscores its strong market position and ability to capitalize on growing demand for its technology across various sectors. The record revenues and robust growth in license and royalty revenues reflect the company's successful execution of its strategy. With solid guidance and strategic investments in R&D, ARM is well-positioned to continue its growth trajectory and deliver value to shareholders.

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