Arm's Earnings Stumble Could Create A Golden Entry Point

Key Points

• Shares of Arm fell in Wednesday's after-hours session as the company's earnings report disappointed. 
• They managed to beat expectations for the headline numbers but fell short regarding guidance.
• This could be creating a golden entry opportunity for those of us who are still bullish on the long term potential. 

After popping more than 100% after their last earnings report in February, expectations would have been high for shares of Arm Holdings plc NASDAQ: ARM to continue rallying into the summer. The UK-headquartered semiconductor and chip software company was riding high off the back of a red-hot IPO and an AI-driven surge in demand for its products. 

But along with the rest of the equity market and tech stocks in particular, Arm saw its stock fall heavily from the end of March through most of April. At its lowest point, shares had fallen some 40%. That being said, they had managed to rally some 25% into last night's earnings report, as investors clearly bought into the idea that last month's slide was overdone and there was simply too much potential for shares to be held down. However, they were in for a rude awakening after the bell rang to end Wednesday's session.

Headline Beat, Guidance Miss

While they managed to beat analyst expectations for the headline numbers, with year-on-year revenue growth of 46%, the company's forward guidance disappointed. For a business still working to establish a track record of consistently profitable quarters, stumbles like this can spook investors. 

While the year to date has seen some return to the risk-on sentiment that drove stocks to record high prices amidst record low interest rates after the pandemic, the macro environment is very different today. Wall Street and investors alike have higher expectations and are less willing to look past or forgive any unexpected decline in momentum. 

So while Arm was able to post fiscal Q4 non-GAAP EPS of $0.36, beating the consensus by 16%, and revenue of $928 million, beating the consensus by a cool $50 million, their lighter-than-expected forward guidance overshadowed this completely.

For the full financial year, Arm is now forecasting revenue between $3.8 billion and $4.1 billion and non-GAAP EPS between $1.45 and $165. However, analysts had been looking for a minimum of $3.98 billion for the former and a minimum of $1.53 for the latter, meaning an adverse reaction in shares can now be expected.

Arm Shares Fall 

We saw this materializing in Wednesday's after-hours session, where Arm shares fell 9%, having already given up more than 1% during the day session. Heading into Thursday's opening, it will be interesting to see how far this continues, with much of that 25% gain since April surely now at risk. 

However, this could be it for those of us on the sidelines who've been waiting for a good opportunity to get into a stock with some serious AI exposure. Just this week, the team at Rosenblatt Securities were reiterating their Buy rating on Arm shares while giving them a street-high price target of $180. While it's unlikely they were expecting the forward guidance to come where it did, that still points to a significant upside of almost 90% from where shares closed in last night's after-hours session. 

Getting Involved in Arm Holdings

Let's not forget that it was a record revenue print for the quarter, too, which showed impressive year-on-year growth and has almost crossed the $1 billion mark for the first time. The company remains super bullish on its prospects, noting with the release that Arm has the world's largest computing ecosystem, and they expect this to continue growing. 

They're continuing to invest in software development, partnering with some of the other top AI companies. They are confident about remaining at the forefront of the industry's transition from on-premise to cloud. This lends itself to the theory that this could be a golden buying opportunity and one to watch closely in the coming weeks.