Why Arm Holdings Stock Surged 21% Higher in February
Key Points
Arm beat Wall Street's sales and earnings consensus estimates in the third quarter.
The company's data center royalty revenue more than doubled, and Arm's management said it will become its largest business in a few years.
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Shares of the semiconductor designer Arm Holdings (NASDAQ: ARM) jumped 20.9% in February, according to data provided by S&P Global Market Intelligence, after the company's third-quarter revenue and earnings beat Wall Street's consensus estimates and as sales from Arm's data center royalty revenue surged higher.
Investors were pleased to see that Arm's third-quarter revenue increased 26% to $1.24 billion, inching past analysts' consensus estimate of about $1.23 billion. The company's adjusted earnings also beat expectations, with Arm's $0.43 per share outpacing the consensus estimate of $0.41 for the quarter.
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And investors are getting more optimistic about the company's potential to benefit from AI.
Image source: Getty Images.
A strong quarter bolstered by more AI growth
Arm is the leading semiconductor designer for smartphones, and until recently, some investors had wondered if the company would benefit from the tech sector's shift to AI. The company's third-quarter results put those fears to rest and then some, with Arm's artificial intelligence data center royalty revenue doubling from the year-ago quarter.
Management didn't give a specific amount for its data center royalty sales, but Arm CEO Rene Haas said on the third-quarter earnings call that "we expect in a few years our data center business to be our largest business, larger than mobile."
That's a significant shift for the company's business, and it shows just how well Arm is tapping into growth from the build-out of AI data centers. Management is optimistic that Arm is in a unique position to benefit as tech companies increase their AI computing needs, with Haas saying,
"The industry requires platforms to deliver high performance, energy efficiency and flexibility across a broad range of power envelopes and use cases. Only Arm's compute platform can address these demands, supporting AI workloads ranging from milliwatts to gigawatts."
The company's strong position in AI data center chip designs was bolstered last month by major tech companies announcing they'll spend up to $650 billion in capital expenditures this year. Most of the money will be directed toward data center infrastructure, which could benefit Arm.
Arm Holdings could see more gains from here
Arm's management issued fourth-quarter revenue guidance of $1.47 billion at the midpoint, which would be nearly 19% higher than the year-ago quarter. Tech giants are locked in an AI race right now, and many of the companies supplying them with the chip designs and hardware they need to compete are directly benefiting from the competition.
That's great news for Arm, and it could help fuel more sales and earnings growth for the company in the years ahead. Investors looking for a smart AI play tapping into the current surge in data center spending should consider buying some shares of Arm right now.
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Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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