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Shares of Arm (NASDAQ: $ARM) fell more than 5.8% in the premarket trading on Thursday after the chip manufacturer issued an unenthusiastic outlook for the current quarter due to its high exposure to the saturated smartphone market. In addition, the company has yet to display meaningful artificial intelligence (AI) growth despite broad expectations. 

Arm’s Revenue Beats Estimates 

Arm, a semiconductor technology provider that went public in September, reported its first post-IPO earnings results on Wednesday.

The company topped Wall Street’s estimates for sales and displayed impressive growth in its licensing business, which doubled over the past year. However, Arm’s shares fell sharply in Thursday’s premarket trading due to weaker-than-expected guidance. 

For its fiscal Q2 2023, Arm reported adjusted earnings per share (EPS) of 36 cents on revenue of $806 million. Analysts on Wall Street were looking for $744.3 million. Net loss was $110 million in the quarter, or 11 cents per share. According to Arm, the loss resulted from a $500 million in one-time share-based compensation triggered by its September IPO. 

Looking ahead, the SoftBank-owned chipmaker expects EPS to range between 21 cents and 28 cents in the current Q3 fiscal quarter, while revenue is projected to land between $720 million and $800 million. The outlook slightly missed Wall Street’s consensus estimates of 27 cents per share for earnings and revenue between $730 million and $805 million. 

A big portion of Arm’s revenue comes from licensing fees the company charges for access to its designs, as well as royalty fees on sales. And while its technology is used in almost every smartphone, this is a slowing and saturated market. That could explain why Arm’s growth expectations are still limited.

Having said that, the chipmaker hopes to expand into more rapidly-growing markets such as AI, self-driving cars, and cloud computing. So far, Arm has shown little in terms of AI-related growth, while costs have mounted across the board. 

Arm, Nvidia Facing Geopolitical Risks Amid US-China Tech Dispute

At a market capitalization of almost $56 billion, Arm’s value surged roughly 40% since Nvidia’s unfulfilled cash and stock offer three years ago. The burgeoning enthusiasm surrounding AI infrastructure has been among the primary drivers of the chipmaker’s valuation. However, despite this impressive growth, Arm’s valuation, at 18 times projected sales, still lags behind Nvidia’s (NASDAQ: $NVDA).

But like Nvidia, Arm is also facing growing risks in terms of geopolitical uncertainties emerging from the persisting technology dispute between the US and China. The latter represented approximately 25% of Arm’s sales in the last fiscal year. 

Do you think the tepid growth is just a temporary headwind for Arm? Also, do you expect the chipmaker to join the AI race soon? Let us know in the comments below. 

About the author

Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird’s US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firm specializing in sensing, protection and control solutions.