AI trading is more selective! Arm's performance beat expectations but still plunged 8% after hours, with focus on smartphone chain and memory constraints.

Despite delivering earnings and profits that both exceeded expectations, shares of British chip design giant Arm Holdings Plc plunged by over 8% at one point during after-hours trading on Wednesday. This dramatic market reaction shows that the threshold for AI-related companies has risen sharply among investors. Arm reported third-quarter revenue up 26% year-over-year to $1.24 billion, slightly above analysts’ expectations of $1.23 billion. The company’s fourth-quarter revenue guidance midpoint is $1.47 billion, also higher than the market average forecast of $1.44 billion. However, according to Bloomberg’s data, some bullish buy-side estimates are as high as $1.5 billion, so Arm’s guidance clearly fell short of the appetite of the most aggressive investors. In addition to the very high requirements for growth, market sentiment is also weighed down by the outlook for the smartphone industry. As an important source of revenue for Arm, the smartphone market is facing both a shortage of memory chips and a slowdown in growth. Peer company Qualcomm also released weak guidance on Wednesday, further intensifying concerns about the fragility of a recovery in mobile device demand. Moreover, “license revenue”—a key indicator for future design adoption—unexpectedly missed forecasts this quarter, which became a trigger for the selloff. **License Revenue “Unexpectedly” Misses** Arm’s royalty income (charged per chip shipped) was $737 million, up 27% year-over-year—significantly higher than FactSet’s consensus estimate of $708 million. However, “license and other” revenue was $505 million, below the market expectation of $520 million. Because license income is often tied to customers' future product plans, the market was especially sensitive to this gap in after-hours trading. Bloomberg also noted that Arm disclosed “data center-related product authorizations doubled year-over-year,” indicating the company is accelerating its search for a second growth curve beyond mobile, but in the short term, smartphones remain the main base of its revenue. **Slowing Phones and Memory Shortage Become Key Variables** The company expects next quarter revenue to be around $1.47 billion (midpoint) and adjusted EPS of $0.58, both above market averages. But what the market cares more about is whether, in an environment of high valuations driven by the AI narrative and fragile sentiment in the chip sector, this degree of upward guidance is enough to offset concerns on the mobile side. Arm directly addressed concerns that “memory shortages and rising costs may weigh on the mobile supply chain.” CFO Jason Child said during a conference call that supply chain constraints are more likely to appear first in low-end models: “In the lowest segment of the market, we may feel the most supply chain constraints.” He also emphasized that royalties from low-end products are lower, so the impact is manageable, and gave a stress test: “If you assume that our unit shipments drop 20% next year, when translated to smartphone royalties, the worst-case impact would be just 2% to 4%.” This view echoes recent signals from the supply chain: high-end models are more likely to “protect configuration,” while the low-end is more easily squeezed by supply and cost fluctuations. **Arm Bets on CPUs and Data Centers** On the AI narrative, Arm is trying to shift its growth focus from “AI in smartphones” to “inference in data centers.” Haas stressed during the conference call that as AI shifts from training to inference, CPUs may benefit in certain scenarios, especially in “AI agent” applications: “AI agents and AI agent conversations … are very well suited to CPUs because CPUs are very power efficient, always-on, and have very low latency.” Bloomberg reported that Haas noted in an interview that demand for Arm designs in the data center market “exceeded expectations,” but he was reluctant to give “vague” long-term growth targets, preferring to keep guidance conservative and focused on execution. Meanwhile, the company expects data center customers to possibly become its largest market in around two years. **SoftBank Has No Plans to Sell** Addressing previous speculation that major shareholder SoftBank Group might sell its stake, Haas reassured investors during the conference call. He stated clearly that he had spoken with Masayoshi Son: “He (Masayoshi Son) assured me he has no intention of reducing his holdings.” Currently, SoftBank still holds about 90% of Arm. Despite management’s firm stance, considering AMD’s recent worst plunge in nearly nine years, and Qualcomm’s weak guidance due to rising memory prices, Arm will continue to face the pressure of valuation restructuring across the entire semiconductor sector. Risk Warning and Disclaimer Markets are risky, and investments should be made cautiously. This article does not constitute personal investment advice, nor does it take into account individual users’ specific investment objectives, financial situation, or needs. 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