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Arm's Forecast Misses Expectations, Shares Dip

Arm's tepid forecast for 2025 revenue and profit falls short of expectations, raising concerns over AI sector spending slowdown.

By Barry Stearns

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5/8, 16:25 EDT
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Key Takeaway

  • Arm Holdings forecasts FY2025 revenue of $3.8-$4.1 billion and EPS of $1.45-$1.65, missing analysts' expectations.
  • Strategic focus on AI and data center hardware under CEO Rene Haas, despite current market skepticism.
  • Stock trades at 27 times sales, making it one of the priciest in AI hardware sector amidst a volatile market.

Revenue Forecast Concerns

Arm Holdings Plc, a prominent chip designer, has recently issued a revenue forecast for fiscal 2025 that has sparked concerns among investors and analysts. The company projects revenue to be between $3.8 billion and $4.1 billion, with profits expected to range from $1.45 to $1.65 per share. These figures have fallen short of analysts' expectations, who had anticipated a revenue of $4.01 billion, marking a 26% increase, and a profit of $1.53 a share. This forecast has led to speculation about a potential slowdown in the tech industry's spending on artificial intelligence (AI), a sector where Arm has been focusing its growth efforts.

Strategic Shifts and Performance

Under the leadership of CEO Rene Haas, Arm has been transitioning its business model to capitalize on the burgeoning demand for AI by expanding its presence in data center hardware. This strategic pivot includes offering more comprehensive technology blueprints to major companies, such as Amazon.com Inc.'s AWS. Despite the lukewarm revenue forecast, Haas remains optimistic about the company's long-term growth, attributing the current success to strategies implemented in the past few years. For the fiscal fourth quarter ended in March, Arm reported revenue of $928 million and an adjusted profit of 36 cents per share, surpassing average analyst estimates.

Market Dynamics and Valuation

Arm's stock has been under the microscope, trading at 27 times sales despite a 30% drop from its peak. This valuation has positioned Arm as one of the most expensive stocks among AI hardware makers, surpassing even Nvidia Corp. The AI sector's mixed earnings season has added pressure on Arm to deliver strong results and forecasts to justify its high valuation. The limited share float, due to SoftBank Group Corp.'s approximately 90% ownership, has contributed to the stock's volatility. Analysts and investors are closely watching Arm's performance, with the options market implying an 11% move in either direction following the earnings announcement.

Management Quotes

  • Rene Haas, CEO of Arm Holdings Plc:

    "Arm remains 'very confident in the long-term growth.'" "A lot of the strategies we put in place a couple of years ago are all coming together."