Shares of Arm Holdings (NASDAQ: ARM), the semiconductor intellectual property licensing company, fell 8% on Thursday after the firm provided a weaker-than-expected revenue outlook for the current quarter.
The disappointing guidance overshadowed Arm’s longer-term growth story and called into question the company’s rich valuation. Arm trades at 45 times forward earnings, well above peers like Nvidia (29x) and the semiconductor industry median (18x).
The tepid forecast follows Arm’s eagerly anticipated IPO in September after being spun off from Softbank Group. Since its market debut, Arm’s shares have slid nearly 20% from their offer price.
Accounting Rule Creates Uncertainty
Analysts attributed the cautious outlook partially to uncertainty related to new revenue recognition rules for Arm’s licensing business. The guidelines require multi-year licensing deals to be accounted for differently, creating challenges in forecasting near-term results.
“We are surprised by [Arm’s] weaker royalty outlook versus its smartphone customers like MediaTek and Qualcomm,” noted HSBC analyst Frank Lee. He added that Arm’s valuation “is still stretched in our view.”
For the third quarter specifically, Arm guided to revenue of $760 million at the midpoint, trailing the Wall Street consensus forecast of $768 million.
Long-Term Growth Thesis Intact
While the near-term licensing headwinds dragged down Arm’s shares on Thursday, multiple analysts emphasized that the company’s long-term growth thesis remains intact.
Arm is uniquely positioned to capitalise on booming demand for artificial intelligence and data center chips, even if it takes time for that to translate into revenues.
“Along with the broader semi industry, [Arm] is seeing strong design activity for data center and AI integration,” commented Justin Sumner, a portfolio manager at Voya Investment Management.
Beyond its core mobile market, Arm is focused on expanding into PCs, servers, automobiles, and other segments to diversify its revenue mix over time.
With its post-earnings slide, Arm’s valuation may be coming back down to earth. But its leading technology and strong customer relationships still make Arm a semiconductor IP leader for the long haul.
