Arm Stock Sinks as Soft Outlook Offsets AI-Fueled Earnings Beat

Arm Holdings (ARM) stock is down plunging Thursday as the chipmaker's weak guidance offsets a fiscal first-quarter top- and bottom-line beat.

In the three months ended June 30, Arm's revenue increased 39.1% year-over-year to $939 million. Its earnings per share (EPS) rose 66.7% from the year-ago period to 40 cents.

"Artificial intelligence (AI) demand and rising compute subsystems (CSS) adoption across major market segments drove record revenue," said Arm CEO Rene Haas in a statement. "As the energy needs of AI continue to escalate, so does the demand for the high-performance, power-efficient Arm compute platform."

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The company's results handily beat analysts' expectations. Wall Street was anticipating revenue of $902.7 million and earnings of 34 cents per share, according to CNBC.

However, sentiment turned negative toward the semiconductor stock when Arm reiterated its full-year outlook, calling for revenue in the range of $3.8 billion to $4.1 billion and EPS in the range of $1.45 to $1.65. The midpoint of these ranges, $3.95 billion in revenue and earnings of $1.55 per share, is short of analysts' expectations of $4 billion in revenue and earnings of $1.58 per share.

Arm also provided an outlook for its fiscal second quarter. The chipmaker anticipates revenue to arrive between $780 million to $830 million and earnings per share in the range of 23 cents to 27 cents. The midpoint of these ranges, $805 million in revenue and earnings of 25 cents per share, are mixed versus the $804.1 million in revenue and earnings of 27 cents per share that Wall Street is anticipating.

In an update to its reporting process, the company announced that it will no longer disclose the number of Arm-based chips reported as shipped. 

"We previously considered the number of chips reported as shipped by our customers as a key performance indicator because it represented the acceptance of our products by companies who use chips in their products," Arm said. "As we shift our focus to higher-value, lower-volume markets such as data center servers, AI accelerators and smartphone applications processors, the number of chips reported as shipped is less representative of our performance as the growth in royalty revenue is concentrated in a smaller number of chips."

Is Arm Holdings stock a buy, sell or hold?

Arm Holdings has been one of the best stocks on the price charts this year, up more than 60%. And Wall Street is generally bullish toward the chipmaker, which went public in September 2023 in one of the biggest IPOs in U.S. history. 

According to S&P Global Market Intelligence, the average analyst target price for ARM stock is $129.81, representing implied upside of about 6% to current levels. Meanwhile, the consensus recommendation on the tech stock is Buy.

But some analysts think the stock is pricey after its run higher. Financial services firm Needham, for instance, has a Hold rating on ARM because of its valuation.

While the company reported solid first-quarter results, this was the first print in which it did not raise its outlook, Needham analyst Charles Shi said in a note this morning. "The lack of upside could be seen as a negative for the stock that trades at a sky-high valuation."

So despite Arm being "a solid business with great growth potential, we remain on the sidelines based on valuation," Shi concluded.

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