Arm Holdings (ARM) Recent Decline Could Reverse With Earnings Surprise

nerdbull1669
11-05

$ARM Holdings Ltd(ARM)$ will be releasing its fiscal second-quarter earnings report after Wednesday (06 Nov) market close.

ARM is recovering from a summer slump, up nearly 34% since early August. But can the earnings report get a positive reception from traders and investors?

So far, we have seen earnings that have most things AI are holding up fine, this means that strong v9 penetration in mobile as well as solid data-center growth" for Arm, though with "less contribution to the top line in nominal terms."

Market is expecting earnings of 26 cents per share on revenue of $808.3 million.

Can ARM RIde The Wave While AI Becomes Increasing Prevalent?

British semiconductor company Arm designs central processing units (CPUs) and compute subsystems, including systems management solutions and software tools that streamline the development of artificial intelligence (AI) applications. Arm does not sell CPUs, but rather licenses its intellectual property to clients that use it to build custom chips. The company generates revenue through licensing fees and per-device royalties.

Arm dominates the mobile processor market due to its energy efficient CPU architecture. In fact, it holds more than 99% market share in smartphones. Additionally, Arm is gaining share in personal computers (PCs) and data centers because its business model affords clients the flexibility to optimize chips to their specific needs. That differentiates the company from Intel and $Advanced Micro Devices(AMD)$ , neither of which offer the same flexibility.

Consequently, several computer manufacturers have launch Arm-based AI PCs, and CEO Rene Haas believes Arm could capture 50% of the Windows PC market within five years, up from 11% today. Additionally, the three largest public clouds -- $Amazon.com(AMZN)$ , Microsoft, and $Alphabet(GOOGL)$ -- have designed data center server CPUs based on Arm architecture.

Arm reported solid financial results in the first quarter of fiscal 2025 (ended June 2024), beating expectations on the top and bottom lines. Revenue rose 39% to $939 million, and non-GAAP net income increased 67% to $0.40 per diluted share. Management maintained its full-year guidance implying 18% to 27% revenue growth in fiscal 2025 (ends March 2025)

Going forward, Arm should benefit as AI becomes increasing prevalent. It enables clients to develop custom CPUs and compute systems optimized for specific end markets without substantial investments in R&D.

Additionally, Arm has the largest compute ecosystem in the world with 20 million developers, which makes it likely its processors will continue to gain share in personal computers and data centers.

If we looked at the market size of ARM-based servers, we are seeing a steady increase since 2022, and on the back of AI growth, I believe we are going to see better results.

Arm Holdings (ARM) Post Earnings Movement - Options

The options market overestimated ARM stocks earnings move 50% of the time in the last 4 quarters. The predicted move after earnings announcement was ±10.9% on average vs an average of the actual earnings moves of 17.8% (in absolute terms).

This shows that ARM tended to be more volatile than the options market predicted for the earnings stock price reaction.

Fast Bearish Crossover

When the moving averages are all crossed in a bullish uptrend but the current stock price drops in a bearish crossover before the moving averages catch up.

ARM is showing fast bearish crossover from the technical, this can be early sign of trend reversal or a pullback testing the uptrend.

If ARM can show an improvement of its earnings on the back of AI growth as we have seen companies benefitting from that growth, we could be seeing a nice move up of at least 10%.

Volatility Spread of 25-Delta Put IV minus 25-Delta Call IV

The implied volatility skew shows the market's bias for pricing in volatility risk to the option premium of downside puts and upside calls.

The implied volatility for downside puts is increasing relative to upside calls, this suggests the market is pricing in a larger fear to a downside move.

The current skew indicator is showing slightly bearish for ARM/

Technical Analysis - MACD and Multi-timeframe (MTF)

With the recent decline in ARM as investors feel that this stock could be overvalued, but considering the AI growth and ARM-based CPUs are picking up for inference, I believe there are better growth ahead.

But we need to be aware of how ARM is trading now as it is trading below the short-term MA ahead of its earnings, this could indicate investors confidence is still not back, and we are seeing MTF giving a neutral signal.

MACD is in a downward trend, we need to see ARM stock price picking up in today (05 Nov) trading, and there should be some positive sentiment coming back for ARM as we are seeing another AI related earnings surge from $Palantir Technologies Inc.(PLTR)$ after market close on 04 Nov.

Summary

There have been some selling off from ARM recently which have bring its stock price on a downward trend, but considering their ARM based architecture is used in names like Amazon, we might be seeing a growth in its earnings for the upcoming report.

Though we need to be aware that there are still some headwinds as US Presidential election is ending today (05 Nov), so how market react might affect the semiconductor sector as well.

Appreciate if you could share your thoughts in the comment section whether you think ARM could make a reversal to the upside if earnings surprise with the AI growth on the mobile and solid data-center growth?

@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.

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