ARM: Unlimited Potential but High Valuation
ARM released its Q2 FY2025 report for the period ending September 30, surpassing expectations. However, its stock fell 5% after-hours as its guidance for the next quarter fell below market estimates.
Q2 Performance Overview
ARM’s Q2 revenue and profit both exceeded expectations:
Revenue reached $844 million, up 4.7% year-over-year, surpassing analysts’ expectations of $810 million.
This 4.7% growth rate is lower than its previous growth of about 40%.
ARM’s revenue primarily depends on tech licensing, which can fluctuate due to large contracts. However, over time, ARM maintains steady growth. For Q3, management expects revenue between $920 million and $970 million, with the upper limit representing a growth rate of 17.7%, although slightly below analysts' $950 million forecast.
For FY2025, ARM maintains its revenue guidance of $3.8 billion to $4.1 billion, aiming for 22.2% growth at the midpoint.
High Valuation
Despite strong fundamentals, ARM’s high valuation raises questions. With a price-to-sales ratio of 42x, ARM trades higher than NVIDIA’s 35x. Although ARM boasts a gross margin of 96%, significantly higher than NVIDIA and Synopsys, its ongoing R&D investments limit short-term profits, making the valuation sensitive to any report shortcomings.
Business Expansion and Growth Potential
ARM’s future is bright, especially in the semiconductor and AI spaces. Initially focused on mobile, ARM now benefits from increased demand for power efficiency, as the traditional X86 architecture struggles to meet rising performance and power requirements in AI applications.
ARM’s architecture has expanded into server CPUs, PCs, IoT, and automotive, diversifying beyond mobile. With AI driving performance needs, ARM’s products see growing demand and pricing power. For instance, its v9 architecture commands higher prices, and while mobile shipments grew only 4%, ARM’s mobile licensing revenue surged 40%.
The v9 architecture now accounts for 25% of the market, up from 10% a year ago. Additionally, ARM’s contract value has risen 13% year-over-year, indicating healthy business momentum.
In summary, ARM’s fundamentals are solid, and its valuation depends on personal preference.
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