Chip design leader ARM Holdings Plc witnessed significant stock erosion Wednesday following its earnings projection, as revenue forecasts fell short of increasingly skeptical investor expectations surrounding artificial intelligence-focused enterprises. The company stated in its announcement that fourth-quarter revenue is anticipated to reach approximately $1.47 billion. While this figure surpasses the average analyst estimate of $1.4 billion, certain projections had climbed above $1.5 billion. Excluding specific items, projected earnings per share stand at 58 cents, exceeding the prior estimate of 56 cents.
For the third quarter ended December 31, Arm's revenue increased 26% year-over-year to $1.24 billion, with earnings per share at 43 cents, both metrics slightly exceeding average market expectations. Following the earnings release, Arm's stock plunged over 8% in after-hours trading. Year-to-date through Wednesday's close, the share price had declined by 4%.
The market's adverse reaction highlights the elevated benchmarks investors are setting for companies within the artificial intelligence sector. Although Arm is expanding its share in AI data center expenditure and reinforcing its established dominance in smartphone technology, its comprehensive benefit from the AI boom remains in nascent stages. Fellow AI processor manufacturer Advanced Micro Devices encountered a comparable situation Tuesday: its broadly optimistic performance outlook still disappointed investors, precipitating the stock's most severe single-day drop in years.
Arm primarily generates revenue through two channels: licensing its chip designs and standards to clients, and collecting royalties based on chip shipments incorporating its technology. A potential concern stems from licensing revenue, viewed as an indicator of future client adoption of Arm products. This quarter's licensing revenue reached $505 million, falling short of the average analyst forecast of $520 million. Royalty income for the same period hit $737 million, exceeding average projections.
Arm indicated that licensing revenue associated with data center-related products doubled compared to the prior year. Chief Executive Officer Rene Haas noted in an interview that market demand, particularly within the data center sector, has surpassed expectations. However, he expressed caution regarding vague long-term growth targets, preferring conservative estimates focused on executing specific objectives.
Under Haas's leadership, the UK-based company is transforming into a more comprehensive semiconductor supplier to enhance pricing power for its products. The firm anticipates that data center clients will become its largest market within approximately two years.
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