Arm Holdings shares dropped 12% on Thursday after the chip architecture giant issued fiscal second-quarter guidance that fell short of investor expectations.
The UK-based company forecast adjusted earnings per share between 29 cents and 37 cents, with the midpoint slightly below the 36 cents per share estimate compiled by LSEG.
In Q1, Arm reported revenue of $1.05 billion, slightly missing estimates of $1.06 billion.
Adjusted earnings per share were 35 cents, in line with expectations. Royalty revenue rose 25% year-over-year to $585 million, while licensing revenue declined 1% to $468 million.
The company signed three new Arm Compute Subsystems (CSS) agreements in the quarter—two for data-center chips and one for PC chips.
Arm’s technologies are now being used by firms such as Nvidia, Microsoft, and Google in AI accelerator designs, and over 70,000 organizations reportedly run workloads on Arm-based servers.
Revenue guidance for the current quarter came in between $1.01 billion and $1.11 billion, broadly in line with the consensus of $1.06 billion.
The cautious forecast, combined with Arm’s announcement that it plans to increase investment in developing its own chips and chiplets, raised concerns among investors.
CEO Rene Haas said in an interview with Reuters that the company would direct more resources toward building physical products such as chiplets and complete chip solutions, a notable shift from its traditional business model of licensing intellectual property (IP) designs to companies like Nvidia and Amazon.
Haas emphasized that Arm’s foray into chip development does not guarantee commercial products and noted that the company may halt or pause efforts as needed.
However, the effort represents a significant evolution in Arm’s strategic direction, potentially placing it in direct competition with its existing customer base.
Shift toward chip development raises strategic questions
Arm’s core business has historically focused on supplying processor designs to major technology firms, particularly in the smartphone space where its IP powers nearly all devices globally.
But the company’s decision to move toward building its own chiplets and solutions signals an ambition to capture higher margins and deepen its presence in high-performance computing markets, including AI and cloud servers.
Chiplets, which are modular, function-specific components used in processor assembly, are expected to play a key role in Arm’s development roadmap.
Haas said the company is looking at “a physical chip, a board, a system, all of the above,” as part of its expanded product strategy.
Still, the CEO refrained from providing a timeline or detailed specifications for any potential products.
Building full-featured chips is an expensive undertaking.
Advanced AI chips, for instance, can cost over $500 million just for silicon development, excluding the added infrastructure costs for supporting hardware and software.
To staff these new initiatives, Arm has been recruiting talent, including from its own customer base, which could lead to potential conflicts.
While the company’s IP business remains central to its operations, these new efforts suggest a broader transformation is underway.
Trade tensions, consumer demand add to uncertainty
Beyond its internal strategy shift, Arm faces external headwinds.
Trade tensions and macroeconomic volatility continue to weigh on global demand, particularly in the smartphone segment.
Despite maintaining a dominant 99% share in smartphone processor architecture, Arm is experiencing softness in royalty revenues from mobile devices, especially in China.
Nonetheless, Arm’s stock, which has gained 12% year-to-date and soared roughly 136% since its 2023 IPO, is facing valuation pressures.
Trading at over 80 times expected earnings, the company’s premium multiple now faces heightened scrutiny amid mixed outlooks from peers like Intel and Texas Instruments.
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