• Arm delivered higher-than-expected Q3 results.
• Guidance suggests growth rate could persist throughout next fiscal year.
• Share price surges more than 72% after the report.

Arm Holdings is the biggest UK chip designer which architects, develops, and licenses high-performance, low-cost, and energy-efficient IP solutions for CPUs, GPUs, NPUs and interconnect technologies, on which many of the world’s leading semiconductor companies rely to develop their products. Arm licenses the instruction sets for modern chips to partners, who then make chips with customizations for their unique applications.

Arm span off from Japan’s SoftBank and went public in September 2023 and listed on the Nasdaq; however, SoftBank still owns roughly 90% of Arm’s shares. Arm’s IPO in the U.S. was the biggest in 2023, valuing the company at $65 billion on the first day of trading.

The company reported its third quarter earnings results on the 7 ^th of February 2024. Arm posted a revenue of $824 million for the quarter ending in December, up 14% year-on-year, smashing analysts’ expectations. The chip designer reported adjusted earnings per share of $0.29 and lifted its full-year guidance from a range of $1.00-$1.10 to $1.20-$1.24. Revenue guidance for the fourth quarter was revised higher to $850 million, beating estimates.

Arm’s revenue was supported by surging demand for new artificial intelligence (AI) applications. The December quarter earnings have improved significantly from the prior quarter in which Arm endured high remuneration costs associated with its listing.

Source: TradingView

The stock price rallied strongly on the back of better-than-expected profit, driven by royalty revenue and better-than-expected licensing revenue. Investors were also encouraged by Arm’s raised fiscal year revenue guidance to a range of $3.15 billion-$3.2 billion from $2.9 billion-$3.1 billion previously.

The share price surged more than 72% since the third quarter result, lifting Arm’s market capitalisation to $152.7 billion, which helped the company to rank among the world’s most valuable chip companies. The upbeat guidance reinforces the view that ARM is a key beneficiary of the AI boom, and especially premium smartphones.

Arm is largely a technology licensing company. The company earns royalties from licensing its designs, used by some of the biggest chipmakers in the world, such as NVIDIA – one of the largest customers for Arm.

Arm’s primary market – smartphone technology, is seeing a recovery from contraction. Arm’s royalty revenue from smartphones had improved as device sales rose and Arm’s V9 designs are in all of the premium smartphones such as Apple and Samsung. Arm provides the computing power needed to run Google’s latest large language model Gemini Nano.

The company is also expanding into new markets as demand for AI surges. Arm continues to gain market share in the growth markets of cloud servers and automotive, which drive new streams of royalty growth.

Despite the bright outlook, the share price almost doubled in three trading sessions and investors might witness some profit taking after such a monstrous run. While shares of the company are tightly held as SoftBank sold less than 10% of Arm during the IPO, which is considered to be beneficial for the value of the shares, traders should brace for some volatility in the coming month as the 180-day lockup period expires on the 14 ^th of March 2024 and SoftBank would have the opportunity to sell shares at its discretion.

Overall, the world is in the early stages of AI adoption and growth is likely to remain robust in the years ahead. While Arm is also a beneficiary, chipmakers NVIDIA and AMD have a central position in the AI boom as they produce most of the processors used for AI models, such as those that power ChatGPT.