Arm stock falls 12% as weak smartphone royalties offset AI data centre growth
Arm Holdings shares fell on Thursday as investors focused on weaker-than-expected smartphone-related royalty revenue, despite the chip designer reporting higher quarterly sales and earnings.
The stock declined around 12% in regular trading, extending its retreat after the company released fiscal second-quarter results.
The decline came as investors increasingly scrutinised weaknesses in companies’ established businesses, even when artificial intelligence (AI) growth remained strong.
Arm reported a 27% year-on-year increase in revenue to $1.44 billion, beating analysts’ expectations of $1.38 billion.
Adjusted earnings came in at 52 cents a share, compared with the 48 cents forecast by Wall Street.
However, royalty revenue rose just 8% to $670 million, below analysts’ estimates of $705 million.
The company attributed some of the pressure to higher memory prices affecting the smartphone market.
Smartphone weakness weighs on royalty revenue
Royalty revenue represents fees Arm receives when partners ship or sell chips built using its designs and architecture.
The slower growth in this segment raised concerns about demand for smartphones, which remain an important part of the company's business.
Arm said its data centre gains were partially offset by the impact of memory pricing on the smartphone market.
Tight memory-chip supply has also been a concern for smartphone manufacturers, including Apple.
The results followed a strong rally in Arm shares, which had gained 75% year to date through Wednesday's close.
The weaker royalty figures gave investors a reason to take profits, despite the company's overall earnings and revenue beats.
Arm expects adjusted earnings of between 52 cents and 60 cents a share in the current quarter.
The midpoint of that range is 1 cent above analysts' expectations.
Analysts assess data centre and AGI CPU opportunities
JPMorgan analyst Harlan Sur maintained an Overweight rating on Arm but lowered his price target to $245 from $255.
He described the results as solid, despite softer smartphone-related royalties.
Sur highlighted licensing revenue, which increased 50% year on year to $773 million, as a key positive.
He attributed the growth to several large agreements and continued conversion of the company's backlog.
He also said Arm's artificial general intelligence (AGI) CPU opportunity was becoming firmer, with purchase orders already secured from multiple customers.
Arm said its confidence in generating up to $2 billion in AGI CPU revenue through fiscal 2027 and 2028 had increased over the past 90 days, supported by additional supply and customer mix.
Morgan Stanley analyst Lee Simpson also described the results as solid but said they offered limited new information.
He noted that the company had made progress on its CPU plans, while the main challenge was executing the initial volume ramp to customers.
Simpson maintained an Equal-Weight rating and a $212 price target.
Data centre royalties remain a longer-term growth driver
Susquehanna analyst Mehdi Hosseini maintained a Positive rating and a $320 price target, highlighting the potential for Arm's AGI CPU business.
Hosseini said the growing contribution from cloud AI to royalty revenue was more than offsetting continued smartphone weakness.
He also pointed to the company's revised AGI CPU revenue opportunity, which he said was roughly twice its previous forecast.
Arm expects data centre royalties to sustain triple-digit growth over the next few years, supported by the expansion of computing platforms from Amazon, Nvidia and Microsoft, as well as rising core counts and the transition of accelerator head-node CPUs from x86 to Arm architecture.
The company has indicated that further updates on its CPU progress, financial outlook and potential products could come with its fiscal third-quarter results and at its next Arm Everywhere event in May or June.
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