Key Points
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Shares of microchip design specialist Arm Holdings have been falling since June/
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Today’s post-earnings tumble, however, has pulled this stock well into multi-month low territory.
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Although Arm’s stock may not be at its ultimate bottom yet, it’s likely nearer that low than not, with much of the technology sector’s sweeping reset having run its full course.
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By most measures, the stock should be well up today. The company’s record-breaking revenue of $1.44 billion in fiscal Q2 was not only up 27% year over year, but handily topped estimates of $1.38 billion. Earnings improved 33% to $0.52 per share as well, versus a consensus of $0.47. Guidance for the quarter currently underway was healthy too, suggesting top-line growth of 24%.
Nevertheless, as of 12:21 p.m. ET, shares of Arm Holdings (NASDAQ:ARM) are down 11.7%, bringing their week-to-date loss to 18%.
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What gives?
It may be more about the market environment right now than not. But, Arm’s second-quarter numbers and third-quarter outlook dished out some degree of disappointment. Taking a cue from other tumbling technology stocks, investors are selling this one too.
Arm Holdings’ red flags
Chief among the red flags behind today’s sizable sell-off is Arm Holdings’ Q2 royalty revenue. While licensing revenue soared 50% to $773 million, royalty revenue only improved by 8% to $670 million, reflecting softness in smartphone memory prices that could linger for the foreseeable future.
This weak royalty number prompted Barclays to lower its price target on ARM from $360 per share to $325, while Goldman Sachs reiterated its sell rating and $160 price target — compared to the stock’s present price near $165 — on the same concern.
That said, although Arm Holdings’ third-quarter revenue guidance of $1.54 billion (+/- $50 million) is technically better than the analyst consensus of $1.53 billion, investors may have been tacitly expecting a stronger growth outlook from the company itself.
Image source: Getty Images.
Perhaps more than anything, however, much of today’s selling can be attributed to the sweeping reset most chipmakers’ stocks are suffering right now. Shares of Nvidia, Micron, and Qualcomm are also all similarly in the red on Thursday, making it easier for investors to throw in the towel on ARM.
Opportunity knocks (if you can stomach the volatility)
There are real reasons for this sweeping sell-off, to be clear. For instance, Qualcomm’s fiscal fourth-quarter handset revenue fell 26%, and guidance for the fiscal first-quarter now underway was lackluster. Other chip companies are seeing similar headwinds.
This correction was inevitable sooner or later, though. It’s also the beginning of a buying opportunity, even if we’re not necessarily at the exact bottom yet. Just watch out for volatility, which is likely to linger even after the bottom is made and we’re on the way back up.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Arm Holdings, Goldman Sachs Group, Micron Technology, Nvidia, and Qualcomm. The Motley Fool has a disclosure policy.
