The booming expectations for AI growth can serve as a double-edged sword, as strong earnings and growing guidance are not always enough to satisfy investors hungry for more.
Elevate Your Investing Strategy:
- Take advantage of TipRanks Premium at 50% off! Unlock powerful investing tools, advanced data, and expert analyst insights to help you invest with confidence.
ARM Holdings (NASDAQ:ARM) was the latest company to feel this burden, as the British-based semiconductor company saw its stock tumble despite outpacing analyst predictions and raising guidance.
ARM is expanding into the data center market, where operators are eager to develop their own chips to power new AI models and decrease their reliance on Nvidia, the dominant supplier. The anticipation of ARM benefiting from this expansion has driven the company’s stock up by 40% this year.
Looking at the company’s financial performance in fiscal Q4, ARM posted a 47% year-over-year increase in revenues at $928 million, exceeding Wall Street’s expectations of $880 million. Its EPS also beat forecasts, coming in at $0.36 compared to the expected $0.30.
Looking forward, ARM’s guidance for Q1 2025 sits between $875 million to $925 million, which is above analyst expectations of $870 million.
Still, this failed to satisfy investors, who were hoping to see even greater gains.
Deutsche Bank analyst Ross Seymore underscored several positive aspects of the earnings report, stating, “Overall, we remain positive on ARM’s unique IP, business model and ability to gain share within a broadening spectrum of semiconductor end markets.”
However, Seymore is not thrilled about ARM’s decision to shift its focus towards its licensing business. While long-term this could lead to greater royalties, the analyst believes that the small number of customers makes this business somewhat volatile and “inherently lumpy.”
All in all, Seymore believes Arm shares trade at “a sizable premium to even the most richly valued peers.” As such, the analyst stays on the sidelines with a Hold rating and an $82 price target, which implies a ~21% downside from current levels. (To watch Seymore’s track record, click here)
A look at the consensus breakdown reveals there is a fairly even amount of ARM bulls and skeptics on Wall Street. The stock’s Moderate Buy consensus rating is based on 6 Buys, 4 Holds and 1 Sell. Going by the $116.67 average price target, shares are expected to appreciate by ~13% over the next 12 months.(See ARM stock forecast)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.