Arm shares drop as revenue forecast falls short despite AI boom

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Shares in Arm dropped by about 8 per cent after the UK chip designer issued lacklustre projections for revenue this year, raising concerns that spending by tech companies on artificial intelligence hardware could slow down.

The SoftBank-backed group, which has been one of the biggest beneficiaries of an AI spending boom since it listed on Nasdaq in September, forecast revenues of between $3.8bn and $4.1bn for the year to March 2025. Analysts had expected revenues of $4.01bn.

The share price fall in after-hours trading came despite Arm reporting a 47 per cent surge in fourth-quarter revenue to $928mn on Wednesday, which pushed annual turnover to more than $3bn for the first time and exceeded its own guidance of between $850mn and $900mn.

The results are Arm’s third since its blockbuster IPO, which valued it at $65bn, the biggest US listing in almost two years. Since then its market capitalisation has soared, reaching a peak of about $117bn in February. Its market value on Wednesday before the earnings announcement was $109bn.

Chief executive Rene Haas said as AI software models such as OpenAI’s ChatGPT and Meta’s Llama, “become larger and smarter, their requirements for more compute with greater power efficiency can only be realised through Arm”.

Revenues were boosted by a surge in royalties for its V9 chip designs, which are licensed to power smartphones, data centres and AI chips manufactured by companies including Nvidia and Amazon to run large language models. Arm sells chip design licences to manufacturers that pay royalties on each unit shipped. Royalty revenue rose 37 per cent to $514mn in the quarter. Arm said chips based on its V9 technology now contribute a fifth of its royalty revenues, compared with 15 per cent in the previous quarter.

Arm revised up its revenue guidance for the fourth quarter in February due to the surging demand for new AI applications that had driven higher demand for its chip architecture.

Shares in AI chip manufacturers such as Nvidia and AMD have rallied this year as tech companies outlined plans to keep spending heavily on AI computing infrastructure, raising forecasts for capital spending in 2024 by billions of dollars.