There was high hopes for holding the arm (arm -1.48%)) We will be entering the third quarter report for 2025 (for the three months ended December 31, 2024). As the UK company’s stocks have shot remarkably over the past year and are trading at premium valuations, it’s not surprising to see the stock fall when it barely matches Wall Street’s expectations.
After releasing quarterly results on February 5th, ARM stock fell by more than 3%. The company easily beat the consensus estimates on both revenue and revenue, but investors were hoping for more when it came to guidance for the fiscal quarter. However, a closer look at ARM’s guidance suggests that investors may have overreacted.
Is ARM’s pullback an opportunity to buy more shares? Let’s look into it.
ARM guidance shows accelerated growth
ARM reported a 19% increase in third quarter revenues compared to the previous year, and an adjusted earnings per share increased by 26%. The company’s guidance for this quarter points to a great jump on both metrics year over year. More specifically, ARM is forecasting current quarterly revenue of $1.23 billion, or $0.52 per share, at the midpoint of the guidance range.
The guidance shows that ARM revenue is on track with a 32% increase from the same period last year, but revenue could increase by 44%. The company’s revenue guidance is consistent with consensus estimates, with revenue guidance in higher shade than expected. However, ARM’s expensive sales are multiples of 47, and a revenue multiple of 214 explains why the company was expected to bring about even stronger growth in the quarter.
The Bulls may argue that accelerated arm growth in the current quarter, along with a slight improvement in the midpoint of full-year guidance, is sufficient to justify that assessment. However, the fact that ARM simply narrowed down its guidance for 2025 rather than upgrading it didn’t sit well with investors.
After all, the company is targeting the fast-growing market for artificial intelligence (AI) chips, with the latest architecture used by chip makers and consumer electronics companies to build chips. More specifically, the company’s adoption of the AI-focused ARMV9 architecture has recovered in both the smartphone and cloud computing markets, leading to increased loyalty revenues.
This is because ARMV9 commands a higher loyalty rate compared to the company’s previous architecture. The good news for ARM investors is that Microsoft and Alphabet have begun production of custom processors to use ARM’s architecture to handle AI workloads in data centers. It should pave the way forward for more royalty income.
Meanwhile, there is an increasing number of companies building chips using arm architectures. This is evident from the fact that the number of licensees using ARM Total Access (ATA) jumped from 27 in the same period last year to 40 in the last quarter. The company says that ATA is “a licensing model that offers the most comprehensive access to ARM IP products, tools, models, support and training, software and physical IP in one easy-to-access subscription.” .
Demand for ATAs increased the last quarter from end markets such as smartphones, AI accelerators and data centers, among other things, suggesting that ARM’s intellectual property (IP) demand is robust. More importantly, the company’s royalty revenue stream should be stronger as these licensees deploy chips based on ARM IP.
Additionally, ARM is part of the Stargate project, backed by MGX based in Openai, Softbank, Oracle and Abu Dhabi. These companies plan to invest $100 billion and $500 billion over the next four years to build AI infrastructure with CEOs in the US. He said of his latest revenue conference: “For ARM, we are extremely excited to be the best CPU for such a platform. In combination with the Grace and Blackwell CPUs, ARM will be the initial configuration CPU.”
All this indicates that your arms may continue to grow at a healthy pace in the long term.
But why not buy stocks?
ARM’s updated revenue forecast for the current fiscal year indicates that revenue is on track. Forecasts for the next few fiscal years show that revenue growth will be strengthened.
YCHARTS estimates of ARMEPS for next fiscal year data
With an increasing number of licensees building chips using ARM architecture, it is likely to lead to an increase in royalty revenue, which is growing at an impressive pace thanks to the adoption of ARMV9, so it’s surprising there is no. For example, ARM’s royalty revenues rose 23% year-on-year in the recent quarter, outperforming overall revenue growth.
The higher royalty rate than ARMV9 commanded improved the company’s profitability.
Weapon profit ratio data from YCHARTS
As a result, we cannot rule out the extent to which future earnings growth rates for the arm will be strengthened. Of course, stocks are traded at premium valuations, but with catalysts like Stargate, it may be possible to justify their valuation with new businesses. Growth investors can consider buying ARM stocks with DIP, as they appear to have been built for long-term growth.
Suzanne Frey, an executive at Alphabet, is a member of the board of directors of Motley Fool. The harsh Chauhan has no position in any of the stock mentioned. Motley Fool has positions and recommends Alphabet, Microsoft, and Oracle. Motley Fool recommends the following options: A $395 phone at Microsoft for January 2026 length and a $405 phone to Microsoft for January 2026 short term. Motley Fools have a disclosure policy.
