Share prices of Arm Holdings (NASDAQ: ARM) initially sank following the cautious outlook it issued with its fiscal 2025 fourth-quarter results on Wednesday, May 7, but the stock has rallied back this week following the news over the weekend that the U.S.-China trade war was cooling down. The stock is now trading up more than 17% over the past year, but down 31% from its summer 2024 all-time highs, as of this writing.
Given the recent volatility the stock has seen, let's take a closer look at the semiconductor company's most recent earnings results and guidance to see what investors should do with their shares.
Image source: Getty Images.
Great results but cautious guidance
While its stock price initially tumbled, Arm's fiscal Q4 results were actually quite strong. Its revenue soared 34% year over year to $1.24 billion, with both royalty revenue and license revenue hitting records. That edged past the $1.23 billion analyst revenue consensus.
License revenue led the way, soaring 53% year over year to $634 million. The company said the growth was driven by significant demand for its Armv9 technology, although it noted that license revenue can fluctuate due to the timing and size of multiple high-value license agreements. The company also signed a multi-year artificial intelligence (AI) partnership with the Malaysian government to accelerate the development of an Arm-based AI ecosystem in the country. The deal will give the country access to Arm technology at the CSS (Compute Subsystem) level to rapidly design chips. This means the country is getting deeper access to Arm's chip design framework.
It increased its number of Arm Total Access licenses in the quarter by 4 to 44. More than half of its top 30 customers use this license. Its Arm Flexible Access customer count reached 314.
Royalty revenue, meanwhile, climbed 18% year over year to $607 million. The growth was driven by the continued adoption of its newer Armv9 architecture, which carries a much higher royalty rate than its v8 technology. It said that its royalty growth was broad-based, with strength in the data center, automotive, smartphones, and Internet of Things verticals.
In the data center market, it said it expects half of new server chips and hyperscalers (companies with massive data centers) to be Arm-based this year. Part of this is due to the acceleration of Nvidia's (NASDAQ: NVDA) Blackwell chip. While Nvidia's graphics processing units (GPUs) are not based on ARM architecture, Nvidia's Grace Blackwell superchip combines its GPUs with Arm-based central processing units (CPUs). Arm also said it is seeing more customers turn to it for custom silicon, both with CPU, GPU, and NPU (neural processing unit) solutions.
Meanwhile, despite only a 2% increase in smartphone shipments in the quarter, Arm saw its smartphone royalty revenue increase 30%. The company's technology is in nearly every advanced smartphone, so this is a huge market for it. The company credited the launch of its Armv9-based platform focused on Edge AI, which processes AI workloads on devices instead of the cloud. It said several smartphone chipmakers have begun using the platform.
Annualized contract value (ACV), which smooths out license revenue, climbed 15% to $1.37 billion.
Looking ahead, Arm management did not offer full-year guidance due to limited visibility. It said that about 10% to 20% of its revenue typically comes from shipments into the U.S.
For the first quarter, it is looking for revenue to range between $1.0 billion and $1.1 billion, representing year-over-year growth of 12%. Royalty growth is projected to be between 25% and 30%. However, it faces a tough comparison for licensing revenue. It projected adjusted EPS to be between $0.30 and 0.38. Analysts were looking for adjusted EPS of $0.42 on revenue of $1.1 billion.
Is the stock a buy?
Arm is seeing nice momentum both in the data center, which should continue with the ramp-up of Nvidia's Grace Blackwell superchip. At the same time, it's also seeing strong momentum with smartphones, despite only modest shipment growth. In the past, the company has said its Armv9 technology royalty rates can be up to double for CSS, which is being used both in data centers and edge devices, like smartphones, to handle AI workloads. As such, the company is proving to be an AI winner.
The cooling of the U.S.-China trade war, meanwhile, should help ease much of the pressure from tariffs. While the company is growing much faster than the smartphone market, shipment volumes are still important. This should allay investor fears about a potential smartphone market slowdown.
From a valuation perspective, the stock trades at a forward price-to-earnings (P/E) ratio of over 67 based on fiscal 2026 analyst estimates. That's high, but toward the low end of the range where the stock has traded in the past since its IPO in September 2023.
Overall, I think ARM should be solid over the long run, and I think it has one of the best models in the semiconductor space. However, given its valuation, I would keep position sizes on the smaller side.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
