By Max A. Cherney
-Arm’s conservative revenue forecast sparked a selloff in the British chip firm’s stock on Wednesday, as investors worried that returns from a spending frenzy on AI computing would be slower to materialize than for chipmakers including Nvidia.
Arm Holdings shares dropped 11% after hours, setting the company up to drop roughly $20 billion in market value if losses held on Thursday. They had climbed more than 90% this year, and closed up 8.4% on Wednesday.
Chipmakers such as market leader Nvidia and Advanced Micro Devices have gotten a big boost from AI processors. But Arm does not see an immediate benefit from designs geared toward generative AI because the company makes money from licensing fees for semiconductor designs and collects a royalty for each chip sold that uses its technology.
It can take years – roughly four years for AI server chips – to realize the windfall from designs it licensed this year, Arm CEO Rene Haas said on a conference call after the report.
“The way to think about all this increased licensing activity is a very good predictor of future royalty growth,” Haas said.
Arm benefits now from a design included alongside some versions of Nvidia’s H100 AI chips. But it will reap even more cash from Nvidia’s forthcoming family of Blackwell chips, of which it has begun to send samples to customers.
Nvidia surged nearly 13% on Wednesday, on expectations its top-of-the-line processors will remain in tight demand after Microsoft reported a massive increase in AI expenditures. AMD shares also rose after the company ratcheted up its 2024 forecast for its AI chip sales.
These gains lifted the PHLX chip index 7%, its biggest daily gain since 2022.
As well, chipmaker Qualcomm forecast fourth-quarter revenue above Wall Street estimates, betting on the need for more chips in smartphones that are getting AI upgrades.
For the current fiscal second quarter, Arm forecast revenue between $780 million and $830 million, compared with an average analyst estimate of $804.1 million, according to LSEG data.
“Despite Arm Holdings’ impressive earnings beat, their cautious (lukewarm) full year forecast has dampened spirits,” said Michael Schulman, chief investment officer of Running Point Capital.
“Arm is still benefiting from the artificial intelligence spending explosion, but weakness in other markets, possibly from inventory gluts has caused management to temper lofty expectations.”
Still, it posted a 39% surge in first-quarter revenue, to $939 million, exceeding analyst estimates of $902.7 million. The boost in revenue was largely because of a “handful” of significant licensing deals the company signed, though its royalty revenue suffered from several weak end markets, Chief Financial Officer Jason Child said in an interview with Reuters.
AI INCOMING
Licensing deals were boosted by the tremendous appetite for the silicon necessary to power AI applications. “We’re seeing more investment (in AI) than we saw even 90 days ago,’ Child said.
Since its IPO last year, Arm has begun to sell designs that are nearly pre-built, so customers can produce chips more quickly. Those deals are lucrative at the initiation stage but Arm stands to make more in royalties when the customers ships its products, which could take months or years.
Child said Arm has seven such customers and will see some royalties from them in the fourth quarter this year, but “next year it’s gonna become meaningful.”
The company has also seen a boost in revenue from customers transitioning to its latest design architecture Arm v9, which now accounts for 50% of smartphone revenue, Child said.
Revenue from China dipped to roughly 13% of total sales, when it often accounts for 20% or more a quarter. Royalties in China grew 114% but its licensing business shrank 68% during the quarter. The significant jump in China royalties means fewer handsets there are using chips made by companies such as Qualcomm and Apple.
Arm’s designs power nearly every smartphone in the world, and the company has attempted to make headway in data centers and other markets.
(Max Cherney in San Francisco; Editing by David Gregorio and Sayantani Ghosh)
