Arm Holdings, a leading semiconductor company, has provided a sales outlook for the third quarter that fell below Wall Street expectations. This announcement has raised concerns about the company’s valuation. Arm attributed the lower sales forecast to a large deal that is expected to be delayed.
Following the news, Arm’s shares dropped by 7.7% in extended trading, closing at US$50.17. However, despite the disappointing third-quarter outlook, the company predicts that its fiscal full-year sales will surpass Wall Street expectations. Arm’s positive sales forecast is fueled by the increasing number of companies designing new chips for artificial intelligence applications.
Arm, which sells designs and intellectual property for mobile phone chips, made its return to the public market in September. Japan’s SoftBank Group still owns over 90% of Arm.
One challenge that Arm is currently facing is complying with new accounting rules that affect how the company recognizes revenue from large, multi-year license deals. The unpredictability resulting from these changes raises questions about Arm’s valuation, as its market cap is significantly higher relative to its expected annual revenue compared to other chip companies.
Ben Bajarin, the CEO and principal analyst at Creative Strategies, highlights the need for a sustainable growth narrative for Arm. He states, The quarter looked good, but the guidance didn’t look good – we don’t really understand what the customer cycle looks like.
Arm’s Chief Financial Officer, Jason Child, explained that the lower-than-expected guidance for the third quarter is due to a major licensing deal that is now anticipated to close a quarter later than initially projected. Child also emphasized the strong demand for generative artificial intelligence as a contributing factor to Arm’s positive full-year sales forecast.
Analysts expected Arm’s fiscal 2024 revenue to reach US$2.95 billion, but the company’s forecast predicts a revenue range with a midpoint of US$3.02 billion. For the current fiscal third quarter, Arm anticipates a revenue range with a midpoint of US$760 million, slightly below analyst estimates of US$767.84 million.
Arm experienced a 28% increase in revenue to US$806 million in its second fiscal quarter, surpassing the average estimate of US$744.31 million. The company’s adjusted profit per share of 36 US cents also exceeded expectations of 26 US cents per share.
Arm has been expanding into various areas, including data center servers and personal computer chips, and seeks to increase revenue through upfront licensing fees and royalties from the sale of chips using its intellectual property.
Arm’s second-quarter royalty revenue declined to US$418 million, slightly below expectations. However, its licensing and other revenue for the same period reached US$388 million, surpassing estimates.
Despite these challenges, Arm remains a dominant player in the semiconductor industry and continues to innovate in emerging technologies. Its collaboration with Nvidia in the personal computer market poses a significant challenge to industry leader Intel.
In conclusion, Arm Holdings’ lower-than-expected sales outlook for the third quarter has raised concerns about the company’s valuation. However, its positive full-year sales forecast and expansion into various chip markets, driven by the growing demand for artificial intelligence applications, provide a promising outlook for the future. Arm remains focused on delivering innovative solutions and maintaining its position as a key player in the semiconductor industry.
