Arm Holdings Plc

Arm Holdings plc (NASDAQ: ARM) is a semiconductor intellectual property (IP) company. The Company develops and licenses IP for various devices worldwide, and it provides development tools that accelerate product development, from sensors to smartphones to servers. Its central processing unit (CPUs) and nomenclature for properties and units (NPUs) include Cortex-A, Cortex-M, Cortex-R, Neoverse, Ethos and SecurCore.

Recent Business and Financial Updates

• Long-Term Growth Strategy: Arm's long-term strategy is geared towards promoting multiple growth drivers. A significant factor contributing to royalty revenue growth is the increasing complexity of chips. AI-enabled devices necessitate significantly higher performance while also requiring energy efficiency and a rapid time-to-market. These market trends are driving demand for Arm compute platforms, based on Armv9, which support more complex AI chips used in smartphones, cloud servers, smart IoT, and networking devices.
• Revenue Growth and Market Adoption: Chips utilizing Armv9 technology now account for approximately 25% of Arm's royalty revenue, up from around 20% in the previous quarter. The increased adoption of Armv9 in the mobile market led to a 50% year-over-year increase in smartphone royalty revenue in Q1. The migration of AI from the cloud to edge devices is anticipated to further drive demand for higher compute capabilities per device. Arm's extensive presence across all end markets positions it uniquely to benefit from this migration, thereby increasing royalty revenue per chip.
• Energy-Efficient Compute Demand: The widespread application of AI is generating demand for more energy-efficient computing solutions. The substantial energy requirements of AI are boosting the growth of Arm's compute platform, recognized as the most power-efficient solution available. During the quarter, Microsoft announced its first generation of Copilot+ PCs on Arm, which offer double the battery life compared to the nearest PC competitor and are on par with Arm-based MacOS counterparts. Major software applications and developer tools now run natively on Windows on Arm, including Microsoft Office, Google Chrome, Slack, and GitHub runners, ensuring an uncompromised user experience.
• Enhanced Performance and Efficiency: Google's newly announced AI-capable Axion products for data centers offer 50% better performance and up to 60% better energy efficiency than legacy solutions. Early in Q2 of FYE25, AWS announced the general availability of the high-performance, energy-efficient Graviton4, providing up to 30% better compute performance than Graviton3. AWS now has 50,000 customers, including all of their top 100 EC2 customers, using Graviton's instances, a significant increase from tens of thousands in less than a year. Initial customers include SAP, SmugMug, and Epic Games, which uses Graviton4 to deliver Fortnite. Currently, ten of the world’s largest hyperscalers, including AWS, Google, Microsoft, and Oracle Cloud, are developing and deploying Arm-based chips in their data centers due to Arm's superior performance and energy efficiency.
• New Product Introductions: During Q1, Arm introduced the Arm Ethos-U85, which enhances performance by four times for edge AI applications such as factory automation, object detection, and image classification. In response to market demand, Arm is increasing investments in Arm Compute Subsystems (CSS). These integrated and verified configurations of Arm technology accelerate customers’ time-to-market and reduce development costs. Arm CSS solutions deliver significantly higher value to customers and increase royalty revenue per chip.
• Expansion and Integration: Arm expanded its CSS offering during the quarter, announcing its latest CSS for Client, aimed at furthering AI capabilities in next-generation smartphones and PCs. CSS for Client combines the benefits of Armv9 acceleration features with production-ready implementations of newly announced Arm CPUs and GPUs on the leading-edge 3-nanometer manufacturing process, enhancing AI capabilities, improving performance and efficiency, and reducing time-to-market. Additionally, Arm introduced KleidiAI software libraries to improve the performance of generative AI workloads on Arm-based devices, capable of tripling the speed for time-to-first token for Large Language Models (LLMs).
• Automotive Advancements: Furthermore, Arm has begun signing agreements for the Armv9-based CSS for Automotive, which was announced last quarter. Customers plan to combine CSS with Arm’s unmatched ecosystem of automotive virtual platforms, software, and tools to create a software-defined vehicle system for Level2+ and Level3 autonomous vehicles. Tata Technologies is enabling its automotive software solutions to work seamlessly with CSS for Automotive to accelerate the development timelines of high-performance vehicle computing systems.
• Ecosystem and Partner Engagement: Arm boasts the world’s largest compute ecosystem, with over 20 million software developers, up from 15 million a year ago. Continuous investment across all market segments aims to accelerate software development on Arm, driving demand for new Arm compute platform solutions and creating a virtuous cycle of increasing software development and demand. New companies are joining Arm’s ecosystem, and existing customers are leveraging their knowledge and experience of Arm technology in additional end markets.
• Recent Collaborations: In recent months, Google and Microsoft announced their first Arm-based chips for the data center. Mediatek joined Arm Total Design, a fast-growing ecosystem accelerating the development of data center chips to meet the performance and efficiency needs of AI applications. This brings the total number of Arm Total Design partners to 25 since its launch late last year. Additionally, Google announced new AI capabilities for Android phones, including integration of their Gemini AI model directly into Android. Currently, 70% of AI-enabled apps on the Google Play Store run directly on the Arm CPU, and the integration of Gemini will enable more apps to leverage the Arm compute platform.
• First Quarter Highlights:
  • Revenues reached USD 939 million, up 39% year-over-year, with record license revenue and robust growth in royalty revenue.
  • License and other revenue increased to USD 472 million, up 72% year-over-year, driven by several high-value license agreements as leading companies commit to deploying Arm-based technology in their future products.
  • Royalty revenue grew to USD 467 million, up 17% year-over-year, due to the rapidly increasing penetration of Armv9-based chips, which typically command a higher royalty rate, and strong growth in premium smartphones.
  • Non-GAAP operating income increased to USD 448 million, resulting in a 47.7% non-GAAP operating margin, and non-GAAP earnings per share of USD 0.40, up 67% year-over-year.
• Financial Performance:
  • Gross Profit and Margin:
    • GAAP cost of sales was USD 33 million, with a GAAP Gross Profit of USD 906 million, representing a GAAP Gross Margin of 96.5%.
    • Non-GAAP cost of sales was USD 24 million, with a Non-GAAP Gross Profit of USD 915 million, representing a Non-GAAP Gross Margin of 97.4%.
    • Non-GAAP adjustments primarily relate to SBC and employer taxes related to SBC, net of research and development (R&D) incentives.
  • Operating Expenses and Margin:
    • GAAP operating expenses were USD 724 million.
    • Non-GAAP operating expenses were USD 467 million, up 23% year-over-year, driven by an 18% year-over-year increase in headcount.
    • GAAP R&D expense was USD 485 million. Non-GAAP R&D expense was USD 298 million, representing 32% of revenue, compared with 36% in the same period a year ago, and up 24% year-over-year, driven by a 23% year-over-year increase in engineering headcount.
    • GAAP selling, general, and administrative (SG&A) expense was USD 239 million. Non-GAAP SG&A expense was USD 169 million, representing 18% of revenue compared with 20% in the same period a year ago, and up 22% year-over-year, driven by a bad debt expense, salaries, and professional fees, partially offset by lower bonus costs.
    • GAAP operating income was USD 182 million, representing an operating margin of 19.4% compared with 16.4% in the same period a year ago.
    • Non-GAAP operating income was USD 448 million, up 65% year-over-year, representing a non-GAAP operating margin of 47.7%, compared with 40.3% in the same period a year ago.
    • Non-GAAP adjustments primarily relate to SBC and employer taxes related to SBC, net of R&D incentives.
  • Non-GAAP Free Cash Flow:
    • Non-GAAP free cash flow (FCF) was (USD 348) million for the quarter, compared with (USD 150) million in the same period a year ago, and for the trailing 12 months was USD 709 million, down 2% year-over-year. Q1 has historically been the lowest seasonal quarter for FCF as the annual corporate bonus for the preceding fiscal year is paid. Additionally, as noted last quarter, Q4 FYE24 experienced a USD 573 million change in working capital benefit primarily due to cash held for payroll tax liabilities related to the IPO share vesting event. This benefit subsequently reversed in Q1 FYE25. This dynamic is expected to impact the comparability of FCF for FYE25 relative to the prior fiscal year.
    • At quarter-end, cash and cash equivalents, and short-term investments totaled USD 2,465 million, down 16% from USD 2,923 million in the prior quarter and up 20% year-over-year.

Technical Observation (on the daily chart):

The Relative Strength Index (RSI) over a 14-day period stands at a value of 33.74, downward trending with the price moving towards next important support range of USD90-USD100, with expectations of upward trend in case those support levels holds. Additionally, the stock's current positioning is between both 50-Day SMA and 200-Day SMA, which can act as a short to medium term resistance and support levels respectively.

As per the above-mentioned price action, recent key business and financial updates, momentum in the stock over the last month, and technical indicators analysis, a ‘Watch’ rating has been given to Arm Holdings plc (NASDAQ: ARM) at the closing market price of USD 121.51 as of August 01, 2024. 

Individuals can evaluate the stock based on the support and resistance levels provided in the report in case of keen interest taking into consideration the risk-reward scenario. 

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and prevailing geopolitical tensions. Therefore, it is prudent to follow a cautious approach while investing.

Related Risk: This report may be looked at from a high-risk perspective and a recommendation is provided for a short duration. This report is solely based on technical parameters, and the fundamental performance of the stocks has not been considered in the decision-making process. Other factors which could impact the stock prices include market risks, regulatory risks, interest rates risks, currency risks, social and political instability risks etc. 

Note 1: Past performance is not a reliable indicator of future performance.

Note 2: The reference date for all price data, currency, technical indicators, support, and resistance level is August 01, 2024. The reference data in this report has been partly sourced from REFINITIV.

Note 3: Investment decisions should be made depending on an individual's appetite for upside potential, risks, holding duration, and any previous holdings. An 'Exit' from the stock can be considered if the Target Price mentioned as per the Valuation and or the technical levels provided has been achieved and is subject to the factors discussed above.

Note 4: Target Price refers to a price level that the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.s

Note 5: ‘Kalkine reports are prepared based on the stock prices captured either from the New York Stock Exchange (NYSE), NASDAQ Capital Markets (NASDAQ), and or REFINITIV. Typically, all sources (NYSE, NASDAQ, or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.