Wide-moat Arm Holdings ARM reported solid results, once again, with fiscal second-quarter revenue of USD 844 million (£649 million), above management’s guided range of USD 780 million-USD 830 million. Investors likely viewed the USD 920 million-USD 970 million revenue guidance for next quarter as slightly weak as shares declined.
Key Morningstar Metrics for Arm Holdings
- Morningstar Rating: 1 star
- Fair Value Estimate: USD 66
- Uncertainty Rating: High
- Economic Moat: Wide
At the USD 945 million midpoint, this implies a 12% sequential acceleration. Full-year 2025 guidance now implies that Arm will see strong sequential acceleration in the fourth quarter too, supported by strong licensing activity and growth in royalties. We maintain our $66 fair value estimate.
While the firm’s growth and outlook in the next few years looks bright we still see the shares as materially overvalued, trading at 37 times our fiscal 2025 sales estimate of USD 4.05 billion. In our view the market is placing overly high expectations on Arm, evident in the shares declining every time the firm exceeds its own estimates. Any setbacks such as a slowdown in customer adoption of v9, a slowdown in artificial intelligence demand, or new scrutiny of controls on exports to China could have a substantial impact on the shares.
The smartphone market continues to be a leading adopter of Arm’s v9 architecture. Smartphone royalty revenue grew by 40% despite smartphone units only growing 4%, thanks to v9′s higher royalty rate. Arm has also booked new licenses for compute subsystems, an evolution of v9, mainly for smartphone and automotive customers.
Arm’s Royalty Rates
Management also explained how Arm’s business model has evolved in recent years. With prior architecture like v7 and v8, which had roughly 10-year life spans, Arm’s royalty rate was fixed during the architecture’s life span. With v9 and newer versions, management intends to gradually raise royalty rates as they introduce gradual computing improvements, resulting in steady increases in royalty rates. This is in line with our estimates as we assume Arm’s blended royalty rate will roughly triple in the next 10 years.
When asked about the litigation process with Qualcomm, Arm’s management gave a vague response. Qualcomm’s management did the same as both firms reported earnings on the same day. The trial is set to start in December, but we still believe that a resolution will be found as a cancellation would be a lose-lose scenario for both firms. Qualcomm is one of Arm’s largest customers.
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