Arm’s shares plunge amid concern over future growth prospects

British chip designer ARM has announced its earnings for the fiscal fourth quarter, which greatly surpassed analyst estimates, due to robust demand for AI chips. 

However, its shares plummeted by 9% in after-trading hours following a weaker-than-expected annual revenue forecast for the full year of 2024. This has raised concerns about whether the growth prospects of the tech firm can justify its hefty valuation.

Arm dominates the chip architecture market, with 99% of smartphones using its platform worldwide. The AI chip leader, Nvidia, attempted to acquire Arm in 2022, but the offer encountered regulatory hurdles. Arm initiated its IPO on the Nasdaq in September 2023. The March-quarter earnings report marks the tech firm’s second release after its debut.

Arm tops market expectations in the quarterly earnings

Arm reported the March-quarter earnings per share of $0.36 on revenue of $928 million, well above the estimated $0.30 and $875.6 million by LSEG.

Its overall revenue surged by 47% from a year ago, with Royalty revenue driving the acceleration, reaching $514 million, a sequential increase of 9% and a year-on-year surge of 37%. The Royalty segment contributes to more than half of the overall revenue, which is the fees that Arm charges for each of its designed chips sold. The segment’s growth has been driven by growing demand for cloud servers. Arm noted it benefited from increased royalty rates in AI-enabled Armv9-based handsets within the smartphone markets. Additionally, Arm-based chips have gained traction in the motor industry.

The other mainstream segment, License and other revenue sales increased by 60% year on year to $414 million, driven by “multiple high-value, long-term license agreements”, according to its earnings report.

Weaker-than-expected guidance raises valuation concerns

Arm anticipates the revenue for the current quarter to range between $875 million (€814.8 million) and $925 million (€861.34 million), with a midpoint of $900 million (€838 million), indicating a sequential growth decline. 

For the fiscal year 2024, the company projects annual revenue between $3.8 billion and $4.1 billion, with a midpoint of $3.95 billion falling short of the estimated $3.99 billion. 

Earnings per share for the full year are expected to range between $1.45 (€1.45) and $1.65 (€1.54), aligning with consensus estimates. However, Arm’s projected revenue growth hardly justifies its share price, boasting a twelve-month-trailing Price-to-Earnings (P/E) ratio exceeding 1,000. 

By comparison, Nvidia and Advanced Micro Devices maintain P/E ratios of around 75 and 222, respectively. Arm’s shares surged by 48% on the day it announced better-than-expected quarterly results in February, suggesting that investors may have been overly optimistic about the newly listed British tech company. The fervent demand for AI technology likely contributed significantly to its hefty valuation.

Arm’s slump may weigh on the market open

After the downturn in Arm’s shares, stocks of other semiconductor makers also edged lower in after-hours trading, with Nvidia down by 0.6%, AMD falling by 0.4%, and Intel dipping by 0.2%. This downward trend may weigh on the market opening, as the technology sector appears to be losing momentum in May, despite overall robust quarterly earnings. 

Investors are eagerly awaiting the quarterly results of the AI chip giant Nvidia, scheduled to be released on 22 May.