Why Arm Holdings Stock Was Climbing Today
Key Points
Arm topped estimates on the top and bottom lines in its Q3 earnings report.
The company warned that smartphone royalty growth could slow next year.
Royalty rates continue to move higher is it invests in new technology.
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Shares of Arm Holdings (NASDAQ: ARM), best known as a designer of power-efficient CPUs, whipsawed following its earnings report after hours on Wednesday.
The stock actually traded down following the earnings report yesterday, and didn't move into positive territory until the regular trading session began today.
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At a time when software stocks and much of the tech sector are getting pummeled, Investors didn't seem to know how to interpret Arm's results, as there was both good and bad news in the quarter, though the company did beat estimates.
As of 11:49 a.m. ET, the stock was up 4.7% on the news.
Image source: Getty Images.
Arm keeps growing
Arm's revenue rose 26% in the quarter to $1.24 billion, edging past estimates at $1.23 billion. Arm earns revenue from selling licenses to use its "instruction sets" and then collecting royalties when the products with those designs sell.
Revenue growth was balanced in both segments as license revenue rose 25% to $505 million and royalty revenue was up 27% to $737 million, driven by higher royalty rates for newer products like Armv9, its newest CPU design, and Arm compute subsystems (CSS).
On the bottom line, adjusted earnings per share increased from $0.39 to $0.43, which edged past the consensus at $0.41.
Margins in the quarter narrowed as the company stepped up investments in research and development, which rose 46% to $512 million on an adjusted basis in the quarter.
What's next for Arm
The stock seemed to sell off last night in part on concerns about weak smartphone sales next year, which is its biggest royalty segment, due to the memory shortage.
For the fiscal fourth quarter, Arm called for revenue of $1.42 billion-$1.52 billion, calling for just 19% growth, though its guidance has historically leaned conservative. The company also sees adjusted earnings per share of $0.54-$0.62, which compares to the consensus at $0.56.
Overall, Arm looks well-positioned to capitalize on the continued growth in AI, and the company said data center royalties will eventually top that of smartphones, boding well for its future growth from AI.
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Jeremy Bowman has positions in Arm Holdings. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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