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Sneha Nahata

Is ARM Stock Still a Buy After Light Q3 Guidance?

Arm Holdings (ARM) just released its Q2 earnings for fiscal year 2025, and while the results surpassed expectations, the stock took a hit in pre-market trading as investors reacted to a slightly softer-than-anticipated Q3 revenue outlook

However, the stock has bounced back quickly, and is now trading up more than 5% this morning. So, given the post-event volatility, is ARM stock a good buy after Q2 earnings? Let’s break it down.

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Q2 Performance Highlights

Arm’s Q2 results were impressive, with revenue climbing 5% year-over-year to $844 million, well above analysts' estimates of $808.4 million. The standout performer was royalty revenue, which jumped 23% to $514 million, fueled by the growing adoption of Armv9 architecture and a recovery in the smartphone market. Armv9 now accounts for 25% of royalty revenue, up from 10% a year ago.

License revenue, however, dipped 15% to $330 million, a decline that was anticipated due to the timing of high-value license deals. However, strong Q2 bookings highlighted the resilience of Arm’s business.

On the earnings side, Arm posted $0.30 per share, surpassing the consensus estimate of $0.26.

Despite solid Q2 results, Arm’s Q3 guidance fell short of investor expectations. The company forecasted revenue between $920 million and $970 million, with a midpoint of $945 million—a 15% YoY increase. While impressive, this trailed the consensus estimate slightly, leading to the stock’s pre-market decline.

This reaction highlights the high expectations tied to Arm’s pivotal role in the artificial intelligence (AI) revolution. Investors anticipate consistent outperformance, especially as AI continues to transform sectors from cloud computing to consumer devices. When companies fall even slightly short, the market can react harshly.

Catalysts to Support Future Growth

Arm Holdings is solidifying its position in the semiconductor industry, leveraging its robust software ecosystem and cutting-edge technology to drive long-term growth. With the vast majority of chips being designed with Arm, it is emerging as the backbone of modern chip design, especially as AI gains momentum across industries.

Arm's Compute Subsystem (CSS) is a key driver of this growth, which has seen its licensing activity double over the past year. With demand for AI solutions skyrocketing, Arm stands out as the only platform capable of running AI workloads seamlessly from edge devices to the cloud.

Further, Arm's latest innovation, the Armv9 CSS for Client, is witnessing solid traction in the mobile processor market. This platform delivers a 36% boost in peak performance and a remarkable 59% improvement in AI inferencing compared to its predecessors. MediaTek's new Dimensity 9400 processor and Apple's (AAPL) iPhone 16 leverage this cutting-edge technology, contributing to a surge in royalty revenues from smartphone application processors.

With major industry players adopting Armv9, royalty rates and revenue per chip are climbing. The company’s management has highlighted stronger-than-expected demand for CSS, which is quickly becoming the default choice for many of its partners' chip designs.

Management stated that the partner demand for Arm CSS is strong, and CSS is becoming the default starting point for many of its partner's chip designs. The company expects CSS to become the primary product for many of its partners' licenses for future chip designs.

The company is making significant strides in the automotive sector. Its CSS pipeline for Advanced Driver Assistance Systems (ADAS) and In-Vehicle Infotainment (IVI) remains solid, providing a solid base for future growth. Demand for Arm’s Edge AI solutions, which leverage CPU acceleration on the v9 architecture, is also booming.

Final Thoughts: Why ARM Stock is a Buy

Despite the volatile initial reaction to Q3 guidance, Arm’s long-term prospects remain bright. The demand for its high-performance Armv9 and CSS compute platforms continues to stay strong, accelerating its licensing and royalty revenue growth rates and supporting its share price. As today's price action suggests, any dip could be the perfect time to accumulate ARM shares at a discount.

Wall Street maintains a “Moderate Buy” consensus rating on Arm Holdings stock, with analysts at JPMorgan and Evercore ISI both raising their price targets after the Q2 results.

www.barchart.com
On the date of publication, Sneha Nahata did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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