TLDR
- Arm stock fell 8.9% in premarket trading after disappointing guidance
- 10-20% of Arm’s royalty revenue comes from U.S. imports vulnerable to tariffs
- Q4 earnings beat estimates with adjusted EPS of 55 cents vs 52 cents expected
- Company predicted Q1 earnings of 34 cents per share, below 42 cents forecast
- Arm noted almost 50% of new server chips to top hyperscalers this year will be Arm-based
Arm Holdings, the chip design powerhouse behind nearly every smartphone processor worldwide, saw its stock take a serious hit on Thursday. The company’s shares dropped 8.9% in premarket trading after its guidance for the current quarter fell short of what Wall Street expected.
The UK-based company had been something of an outlier in the chip sector. While many semiconductor stocks slumped under tariff threats, Arm had edged up this year.
Many investors thought Arm’s business model would shield it from tariff troubles. After all, chip makers license Arm’s designs and pay royalties on each chip sold, rather than manufacturing the chips themselves.
That theory got punched in the nose this week.
Tariff Vulnerability Exposed
Arm management revealed that 10% to 20% of its royalty revenue comes from U.S. imports. This makes the company more vulnerable to tariff-driven demand weakness than previously thought.
The company’s chip designs dominate the mobile phone market. Arm is also expanding into processors for personal computers and high-end servers.
Major tech players like Apple, Qualcomm, and Nvidia all count themselves among Arm’s customers.
For the quarter ended March 31, Arm did beat estimates. The company reported adjusted earnings of 55 cents per share on sales of $1.24 billion.
Analysts had expected 52 cents per share on sales of $1.23 billion. Year-over-year, this represented a 53% jump in earnings and a 34% increase in sales.
The problem came with the forecast.
Guidance Misses the Mark
For the current quarter, Arm predicted adjusted earnings of 34 cents per share on sales of $1.05 billion, based on the midpoint of its outlook.
This fell well short of Wall Street expectations. Analysts had been looking for earnings of 42 cents per share on sales of $1.1 billion.
The guidance miss hit particularly hard because of Arm’s premium valuation. Before Thursday’s session, Arm was trading at around 64 times its forecast earnings for the current fiscal year.
“We believe Arm’s premium valuation leaves little room for guidance misses, despite its superior margins and recurring revenue profile,” wrote CFRA analyst Angelo Zino.
William Blair analyst Sebastien Naji lowered his estimates for Arm’s fiscal 2026 revenue growth to 15% from 20.5% previously. However, he maintained an Outperform rating on the stock.
Breaking down the recent quarter, Arm’s licensing revenue rose 53% year over year to $634 million. Its royalty revenue increased 18% to $607 million.
The company continues to make progress on its diversification strategy. It’s seeing royalty revenue growth across all target markets, including data centers, automotive, smartphones, and Internet of Things devices.
In their shareholder letter, CEO Rene Haas and CFO Jason Child highlighted that Nvidia and major cloud service providers are ramping up production of new Arm-based server chips.
They noted that “with more AI software being written first for Arm-based chips, we expect close to 50% of all new server chips shipped to top hyperscalers this year will be Arm-based.”
In after-hours trading on Wednesday, Arm stock dropped more than 9% to $112.51. During the regular session, the stock had advanced 1.4% to close at $124.19.
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