Arm's Earnings Pressure High at 27x Sales, AI Sector Watches

Key Takeaway

• Arm Holdings Plc faces high expectations for its Wednesday earnings, trading at 27 times sales despite a 30% drop from its peak.
• The AI sector's mixed earnings season puts additional pressure on Arm to deliver strong results and forecasts to justify its valuation.
• With Softbank holding ~90% of Arm, the limited share float increases stock volatility, emphasizing the importance of upcoming earnings.

Arm's Earnings Anticipation

Arm Holdings Plc, a leading semiconductor designer, is facing high expectations for its upcoming Wednesday earnings report. Despite a nearly 30% drop from its peak, Arm's stock remains the most expensive among artificial intelligence (AI) hardware makers, trading at 27 times sales projected over the next 12 months. This valuation surpasses even Nvidia Corp., which has benefited significantly from the demand for AI computing hardware. Investors are looking for bullish signals to justify Arm's high valuation, especially after the stock more than doubled since its September initial public offering.

Jay Woods, chief global strategist at Freedom Capital Markets, suggests tempering expectations regarding the stock's performance post-earnings. The options market is implying an 11% move in either direction for Arm shares following the results, indicating potential volatility. In February, Arm's stock surged 48% the day after its earnings announcement, buoyed by a strong revenue forecast.

AI Sector's Mixed Earnings Season

The current earnings season has presented a mixed bag for AI-related companies. Firms demonstrating that their investments in computing gear will yield significant returns have been rewarded, while others have faced investor skepticism. Meta Platforms Inc., for example, experienced a negative market reaction after announcing substantial AI spending plans, raising doubts about its future revenue streams. Similarly, Super Micro Computer Inc. saw its shares decline after its quarterly sales slightly missed estimates.

These precedents suggest that Arm will need to deliver exceptional results and forecasts to avoid a similar fate. Analysts expect Arm to report fourth-quarter sales of $879.2 million, a 39% increase from the previous year, with adjusted earnings projected at 30 cents per share, up from break-even a year ago.

High Valuation and Market Dynamics

Arm's high valuation is partly attributed to the limited number of shares available for trading, a result of Softbank Group Corp.’s approximately 90% stake in the company. Michael Sansoterra, chief investment officer at Silvant Capital Management LLC, believes that despite its expensive stock, Arm's expansion into new markets and rapid growth justify the valuation. The limited float contributes to higher volatility in Arm's shares, making each transaction more impactful on the stock price.

Street Views

• Jay Woods, Freedom Capital Markets (Neutral on Arm Holdings):

  "People should temper their expectations as far as how well this will act with a positive result."

• Michael Sansoterra, Silvant Capital Management LLC (Bullish on Arm Holdings):

  "It is an expensive stock, but it’s also a stock that’s expanding into new markets and growing quickly... Anytime they get bought or sold, you’re going to see a slightly higher volatility in the shares because of that smaller float."