Arm Earnings: Lofty Expectations Continue; Armv9 Drives Growth in Smartphones

Wide-moat Arm Holdings’s revenue and adjusted EPS came in above management guidance in the fiscal first quarter at $939 million and $0.40, respectively, compared with management’s guidance of $875 million-$925 million and $0.32-$0.36. However, this wasn't enough to satisfy investor demands and shares were down 12% in aftermarket trading to about $126 per share. Although management had already expected the second quarter would be the low of the year due to the timing of license revenue, the $780-$830 million sales guidance was dimmer than expected. Management also moderated its yearly targets slightly and expects royalty revenue growth in the low-20% range compared with mid-20% previously. Like with other tech stocks, we surmise investors were expecting a beat and raise of guidance to justify Arm’s lofty valuation. Our forecasts are unchanged and we maintain our $66 fair value estimate. Over the next few years, we assume Arm will continue raising royalty rates, gaining share in the data center and auto markets while expanding operating margins. We see shares as overvalued.