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Key Takeaways
- Arm shares soared 48% Thursday after the company beat quarterly earnings expectations and provided strong guidance, as demand for artificial intelligence hardware surges.
- Arm said it expects the next quarter’s royalty revenue to be even stronger than the last as the company’s v9 processor architecture garners approximately double the royalty rate of the previous v8 product.
- Analysts said they expect Arm to be a key beneficiary of rising demand for AI devices, particularly premium smartphones.
- The chip designer’s customers include some of the world’s most valuable AI heavyweights such as Nvidia, Google parent Alphabet, and Microsoft, among others.
Arm (ARM) shares jumped nearly 50% Thursday after the semiconductor designer beat quarterly earnings estimates and boosted its forecast for the year on surging demand for artificial intelligence (AI) processing hardware.
Many analysts raised their price targets for Arm stock after its blowout earnings, citing better-than-expected royalty revenue, though with Thursday’s gains, shares have already surpassed some of the raised price objectives.
The company’s shares finished 48% higher at $113.89 Thursday, after rising as high as $126.58 in intraday trading. They’ve gained 87% since Arm made its debut on the Nasdaq in September of last year.
A key way Arm makes money is by earning royalties on products made by chip companies that license its designs to make products, and its customers include some of the world’s most valuable AI heavyweights such as Nvidia (NVDA), Google parent Alphabet (GOOGL), Qualcomm (QCOM), and Microsoft (MSFT), among others.
“We’re involved in just about every single market, and every single market is putting more and more compute into their devices,” Arm Chief Executive Rene Haas said during an interview on CNBC Thursday.
After the better-than-expected fiscal third quarter, Arm said it expects the next quarter’s royalty revenue to be even stronger as the company’s v9 processor architecture garners approximately double the royalty rate of the previous v8 product.
Jefferies analysts said they view Arm as “a key beneficiary of rising demand for edge AI devices, especially premium smartphones.”
They noted that “China was the main contributor to the better-than-expected FYQ3 performance” and that the firm “estimate[s] that royalties accounted for most of this strength, led by strong sales of premium smartphones like the Huawei Mate 60.” Last week, Apple reported weak iPhone sales in China amid stiffer competition from China-based phone makers.
Jefferies analysts said that the firm believes “we are at the early stages of an AI-led smartphone cycle, supported by advanced chipsets like Qualcomm’s Snapdragon 8 Gen 3 and Mediatek’s Dimensity 9300 that are based on the V9 architecture.”
“AI-enabled smartphone demand is further strengthening” Arm’s position as AI is “driving higher chip design activity and, therefore, higher licensing revenue.”
Bank of America analysts acknowledged that the “bears would cite lumpiness in licensing deals, China sales, and stock volatility,” but indicated that the firm finds that “they miss the big picture around accelerating 30%+ annual royalty sales at highly accretive margins.”
The analysts added that Bank of America believes that almost every hyper-scaler “has or is working on its internal ARM-based server CPU or looking to ARM solutions from NVDA (Grace Hopper) or other merchant suppliers,” which could help Arm expand its market share from less than 5% to 10% to 15%, allowing it to better compete with Intel (INTC) and Advanced Micro Devices (AMD).
CFRA noted that while royalty revenue was higher than expected, the firm finds that “data centers remain ARM’s biggest growth opportunity.”