Arm's earnings report fell short of expectations, and it may transform into a complete chip manufacturer, dropping 8.5% in after-hours trading | Earnings Report Insights

Chip architecture supplier Arm Holdings announced its earnings report after the U.S. stock market closed on Wednesday, showing that the company's performance last quarter slightly missed analysts' expectations. CEO Rene Haas stated that the company is investing in the development of its own chips, marking a significant shift in its business model. Following the news, Arm's stock fell 8% in after-hours trading.

Here are the key points from Arm's Q1 earnings report:

Key Financial Data:

Revenue: Arm's Q1 revenue was $1.05 billion, slightly below analysts' estimate of $1.06 billion.

Net Profit: Arm's Q1 net profit was $130 million, down from $223 million in the same period last year.

Adjusted EPS: Arm's Q1 adjusted earnings per share was $0.35, in line with expectations.

Performance Guidance:

Revenue: Arm expects Q2 revenue to be between $1.01 billion and $1.11 billion, consistent with analysts' expectation of $1.06 billion.

Adjusted EPS: Arm forecasts Q2 adjusted earnings per share to be between $0.29 and $0.37, with the midpoint slightly below the analysts' average estimate of $0.36.

After the earnings report was released, Arm's stock plummeted over 8.5% in after-hours trading. Since its IPO in 2023, Arm's stock price has surged about 150%. Currently, its stock price is equivalent to more than 80 times its expected earnings, far exceeding the price-to-earnings ratios of Nvidia, AMD, and other AI-focused chip manufacturers.

The company is becoming a complete chip manufacturer and may compete with its customers

Arm has primarily profited by licensing its chip blueprints to other companies. Media reports indicate that the increased investment in developing its own chips signifies Arm's departure from its long-standing business model of providing intellectual property to companies ranging from Nvidia to Amazon. These customers already possess chip design capabilities. Haas stated that the so-called "finished chips" are essentially the "Compute Sub Systems (CSS)" products that Arm currently sells.

In an interview with the media, Haas said:

"We are consciously deciding to increase our investment, which means we may no longer just do design but start building things, such as chiplets, or even complete solutions."

Chiplets refer to modular, smaller versions of large chips, with each chiplet performing a specific function. Designers can combine multiple chiplets to form a complete processor. Media reports suggest that to build a team capable of producing chiplets and finished chips, Arm has begun poaching from its customers and competing for orders However, Haas declined to disclose when the company's investment in this new strategy would become profitable, nor did he specify details about the related products. He stated that Arm would consider developing a "full suite of products" including chiplets, physical chips, motherboards, and systems.

In recent months, chip companies have begun to focus more on building server hardware and server racks around chips. NVIDIA is selling its NV72 rack system, while AMD has entered the system-level product manufacturing through the acquisition of ZT Systems.

Analysts believe that this business expansion may lead Arm to start competing directly with its customers, as these customers are also designing finished chips and chiplets for their own products.

Haas also mentioned that the company has the opportunity to provide solutions for the U.S. "Stargate," and work in this area has already begun, but he could not provide more details about the opportunity to participate in Stargate.

Weak Demand for Smartphones, Guidance Slightly Below Expectations

In its financial report, Arm projected that profits for the second fiscal quarter would be slightly below analyst expectations. Analysts believe this may be due to the global trade tensions potentially impacting demand in its primary market—the smartphone sector. Arm's chip technology supports nearly all smartphones globally, and its conservative performance forecast reflects the uncertainty brought about by U.S. President Trump's tariff policies, which are affecting global manufacturers and their suppliers.

Arm's revenue primarily comes from intellectual property licensing deals and royalties charged for each chip produced using its technology. Smartphones remain Arm's core market. Analysts expect Arm to continue to dominate the smartphone processor market, currently holding a 99% market share in this field.

Arm's revenue for the first fiscal quarter was $1.05 billion, up from $939 million in the same period last year. The revenue growth was mainly driven by an increase in the usage of Arm architecture chips in data centers, with related royalty income growing by 25%.

However, global trade tensions have cast a shadow over market prospects. Due to uncertainties brought about by tariff fluctuations and macroeconomic challenges, final market demand has weakened. According to data from the International Data Corporation (IDC), global smartphone shipments are expected to grow by only 1% during the period from April to June 2025.

Additionally, Arm is also attempting to diversify its development by entering the rapidly growing data center market. Clients such as Amazon's cloud computing division have begun using Arm's technology in this field