Arm's performance guidance falls short of expectations, but does not affect Wall Street's bullish stance

According to the Zhitong Finance and Economics APP, Arm (ARM.US) experienced a sharp decline on Thursday due to performance guidance falling short of expectations. Despite this, several Wall Street analysts continue to defend this British chip design company and express optimism about its prospects.

Bank of America analyst Vivek Arya wrote in an investor report, "The growth of the licensing business drove first-quarter performance above expectations, but cyclical headwinds in the Internet of Things, networking, and industrial sectors are keeping the forecast for the 2025 fiscal year basically unchanged, including slightly lower-than-expected second-quarter guidance."

The analyst added, "Due to the lack of upward momentum, the stock's premium valuation may come under pressure in the short term. However, we reiterate our 'buy' rating because we believe Arm's position in some of the most important trends in the chip field is unique, including the increasing complexity of computing and networking driving higher royalties; the desire of top cloud computing customers to design custom chips, and the extension of artificial intelligence from core to edge."

Arya reiterated his "buy" rating on the stock with a target price of $180. However, Arya acknowledged that the "lack of upward momentum in the short term" and Qualcomm's (QCOM.US) comments on "limited" growth in the smartphone industry could put pressure on the stock.

"Growing Interest"

Other analysts, including Morgan Stanley's Lee Simpson, also defended Arm, stating that the strong performance of the licensing business "indicates a growing interest in Arm products."

Simpson wrote in an investor report, "As expected, the licensing business performed strongly, and we note some long-term agreements, including the highly anticipated deal with Apple (AAPL.US). Shareholder communications also discussed the momentum in AI design and the expansion of Arm's application in edge AI."

Simpson rated Arm as "hold" with a target price of $190. He also pointed out that Arm's v9 architecture currently accounts for about 25% of royalties (up from 20% in the previous quarter), with "strong momentum" in the smartphone sector as manufacturers focus on artificial intelligence, which should continue into the 2025 fiscal year.

Simpson added that despite the lower-than-expected second-quarter guidance, considering the broad driving factors, Arm's performance this year should continue to exceed expectations.

Citigroup analyst Andrew Gardiner also highly praised Arm and raised the target price from $140 to $170 after the performance announcement.

Gardiner added that while short-term weakness in royalties is a "negative factor" (which may have influenced the company's decision not to raise full-year guidance), the strong performance of the licensing business in the long term should be enough to offset the weakness in royalties.

Barclays analyst Tom O'Malley also raised Arm's target price after the performance announcement, from $105 to $125, and maintained a "hold" rating