By Adam Clark
Arm Holdings was falling sharply early Thursday. Hopes that the chip designer would be protected from tariffs like its semiconductor peers look to have been wide of the mark.
Arm stock was down 8.9% in premarket trading on Thursday after its guidance for the current quarter came in short of analysts' expectations.
The shares had edged up so far this year, defying a broader chip-stock slump, amid hopes that its business model would be resilient against tariff threats. Chip makers license Arm's work and then pay a small royalty for every Arm-designed chip they sell.
However, Arm management estimated that 10% to 20% of its royalty revenue stems from U.S. imports, which are vulnerable to tariff-driven weakness in demand. The U.K.-based company's designs are ubiquitous in the mobile phone market and it is expanding in processors for personal computers and high-end servers. Arm's customers include Apple, Qualcomm and Nvidia.
"While we continue to like Arm over the long term given its improving IP monetization and share gain potential, we are more cautious on the stock near term given its broad macro exposure," wrote William Blair analyst Sebastien Naji in a research note.
Naji lowered his estimates for Arm's fiscal 2026 revenue growth to 15% from 20.5% previously, although he kept an Outperform rating on the stock with no price target.
Another reason for the sharp drop is likely to be Arm's hefty valuation. Heading into Thursday's session, Arm was trading at around 64 times its forecast earnings for its current fiscal year, according to FactSet.
"We believe Arm's premium valuation (>40x CY 26 P/E) leaves little room for guidance misses, despite its superior margins and recurring revenue profile," wrote CFRA analyst Angelo Zino in a research note.
Write to Adam Clark at adam.clark@barrons.com
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May 08, 2025 06:26 ET (10:26 GMT)
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