To The Moon

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The Story So Far:

On Wed, 08 May 2024 $ARM Holdings Ltd(ARM)$ provided its 2024 full-year revenue forecast, and it did not meet investors’ expectations.

These investors had previously driven up the chip designer’s shares after its $51 per share initial public offering (IPO) in September 2023, due to optimism around artificial intelligence (AI).

Following the report, Arm’s shares fell by almost -9% during extended trading to $96.56 per share.

While Arm’s Q4 2024 (Jan to Mar) earnings exceeded expectations, its full-year guidance highlights uncertainty regarding the pace of AI computing expansion.

Summit Insights, Analyst Kinngai Chan explained, “The drop in shares is due to the outlook. Arm was priced for outperformance, which did not materialize.”

At the same time, other AI chipmakers, including $NVIDIA Corp(NVDA)$ & $Advanced Micro Devices(AMD)$ also saw their shares decline by approximately -0.5% after Arm’s quarterly report.

For Q4 2024:

• Arm’s forecast revenue in the range of $875 million to $925 million, with a midpoint of $900 million.

• According to LSEG data, this estimate differs from the average analyst prediction of $857.5 million.

• Arm’s Q4 2024 revenue surged by +47% to $928 million, surpassing analyst estimates of $875.6 million. (see above)

For FY 2024:

• Arm expects full-year revenue to fall between $3.8 billion and $4.1 billion, with a midpoint of $3.95 billion.

• This contrasts with the consensus estimate of $3.99 billion.

• On earnings per share, Arm anticipates a range of $1.45 to $1.65 for the full year, compared to the average analyst estimate of $1.54.

What CFO said.

Arm’s finance chief, Jason Child, emphasized:

• The need to set a target based on confidence in Arm’s ability to deliver.

• The acknowledgement that the timing of licensing deals can be challenging to predict.

• That is why the company provides a range for guidance.

Investors have been betting on Arm’s success in the AI computing market, doubling its share price since the IPO.

According to LSEG data, Arm’s shares trade at nearly 70x expected earnings, whereas heavyweight chipmaker Nvidia’s shares trade at 35x earnings.

Arm’s revenue source:

• Licensing fees for its semiconductor designs.

• Royalties collected for each chip sold that utilizes Arm’s technology.

During the quarter, Arm secured 4 major licensing agreements, contributing to substantial growth in that segment. (see above)

The royalties business benefited from a new Arm design that commands a higher rate, now accounting for 20% of the segment, a growth of 5% points. (see above)

While Arm’s designs are integral to chips powering AI applications, the company’s revenue and profit have not seen the same AI-driven boost as Nvidia’s, comparatively speaking.

My viewpoints: (mine & mine only)

When reading above post, there were several questions that came to mind:

• Are Artificial Intelligence related stocks so overpriced that even billionaire investors are jumping ship for now? (see above)

• Did investors and Wall Street overvalue the AI-related stocks based on growth rates that is always hard to predict?

• Given that Arms is trading at 70x its expected earnings, will there be further consolidation in the pipeline, presenting a buying opportunity further down the road?

From the look of things, it pays to be the early bird that catches the worm and not the subsequent bird.

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