【Earnings Preview】Arm, two major concerns have emerged! Can they be addressed?

moomooニュース米国株 wrote a column · Nov 5, 2024 16:27

$Arm Holdings (ARM.US)$ is After the market closes on November 6 (local time),They plan to announce the earnings reports for the July-September period.

●Market forecastsThe revenue and adjusted EPS are expected to weaken for the July-September period. Recovery is expected from the October-December period onwards.
●Key points of this timewill be whether the two concerns that emerged just before the earnings reports can be resolved.To clear up the two concernswill be the question.
1）Effects due to the downturn in the main smart phone market
2）The impact of escalating tensions with major customer Qualcomm

Market forecasts
Slowing expected in the July-September quarter, with attention on the guidance for the October-December period
◇Based on market forecasts compiled by Bloomberg,July-September quarterrevenue is expected to increase by 0.6% from the previous year to 0.81 billion dollars, compared to a 39% increase in the April-June quartergrowth is slowing downAdjusted EPS is expected to decrease from $0.40 in the 4-6 months period to $0.26 (compared to -$0.08 in the same period last year).

◇However,Performance is expected to recover after the October-December period.PerformanceRecoveryis expected. Therefore, in addition to the results of the July-September period, more attention will be paid to the company's guidance for the period from October to December and the full year.

【Earnings Preview】Arm, two major concerns have emerged! Can they be addressed?

At the previous earnings announcement,
The stock price fell due to mixed earnings results.
◇The financial results for the April-June quarter, announced on July 31st,revenueexceeded market expectations of $0.905 billion with an increase of 39% from the same period last year, reaching $0.94 billion. Among these, license revenueexceeded market expectations of $0.418 billion by reaching $0.472 billion. The revenue guidance for the July-September quarter ($0.78 billion to $0.83 billion) also generally matched market expectations.

◇However,Royalty incomefell short of the market estimate of 0.492 billion dollars at 0.467 billion dollars. The company attributed this to weakness in some markets.maintained its full-year revenue guidance at an 18% to 27% increase from the previous year. These two factors led to a stock price decline right after the earnings announcement.At that time, the company kept its full-year revenue guidance at an 18% to 27% increase from the previous year. These two factors led to a stock price decline right after the earnings announcement.

Key points of this time
Whether the company can address the "two concerns" that arose just before the earnings announcement
1) Impact of stagnation in the main smart phone market
Earnings from smartphone-related companies imply that the slowdown in the smartphone market, which is Arm's main market, may continue. This could potentially affect the company's future royalty income.

(※ Engaged in smartphone-related semiconductors $Amkor Technology (AMKR.US)$ and $Qorvo (QRVO.US)$ In the recent earnings reports, both companies announced weak guidance. The revenue forecasts for the October-December period of both companies are disappointing, with Arko falling below the market estimate of $1.8 billion at $1.6–1.7 billion, and Kolbo falling short of the market estimate of $1.05 billion at $0.875–0.925 billion. Apple is a key customer for Arko, while Kolbo's main customers are Qualcomm and Samsung Electronics. $Apple (AAPL.US)$ with Samsung Electronics.

Comprising half of Arm's revenueRoyalty income, of which the proportion from smartphonesAlthough the market share of mobile phones has been declining, it still accounts for 40% (as of March 2024). When combined with other mobile aspects, it has reached 47%, so analysts continue to emphasize royalty income from mobile phones.

Breakdown of ARM's royalty income by market, Source: ARM's earnings reports

Trends in ARM's royalty income and licensing revenue, Source: ARM's earnings reports

Bernstein's lead analyst downgraded Arm's investment rating to 'Underperform' on October 31, citing concerns about non-AI revenue. In response, Arm's stock dropped by 8% that day.In the short termFor Arm's stock price, there may be a greater focus on non-AI revenue. If the earnings report addresses these concerns, it could lead to a buyback. However, if weak forecasts are presented as anticipated, other analysts might also adjust their investment ratings and target stock prices.

Additionally,In the medium to long term,The 'potential for growth' in the field of AI is even greater, and that is supporting ARM's high valuation. It is believed that exceeding market expectations in the field of AI can be a positive development.

2) Impact of Escalating Conflict with Qualcomm
There is an escalating conflict over licensing agreements between Arm and its major customer $Qualcomm (QCOM.US)$ It is noteworthy whether information regarding the escalating conflict and outlook at the earnings call will be revealed.

Bloomberg reported on October 23rd that Arm has implemented a 60-day prior notice obligation to cancel the semiconductor design license agreement with Qualcomm, as reported. In response, Qualcomm countered, saying that the claim of contract termination is completely groundless, as Arm's desperate tactics are attempting to disrupt the legal process amid the upcoming December (mid-month) trial, stating that Arm's baseless threat was aimed at increasing royalty rates.

なお、アナリストたちは、最終的に両社が「和解」する可能性が最も高いBoth companies may become competitors in the future, but at this stage, they still have a relationship of mutual dependency. Qualcomm accounts for 10% of Arm's annual revenue (fiscal year ending March 2024) as one of Arm's major customers. While Arm only represents about 2% of Qualcomm's suppliers (in 2024), the reality is that Arm heavily relies on Qualcomm for its design licenses.

他方、「和解」はライセンス契約の見直しが伴うと予想されている。クアルコムはアームの「ロイヤリティ料率引き上げMany analysts expect the possibility of accepting the condition. If the analysts' expectations come true, it will be a positive factor for ARM.Positive factor.However, the risk for ARM is failure to increase royalty rates and being indicated as having limited pricing power, according to Bloomberg Intelligence.Risk(Qualcomm is also scheduled to announce earnings after the market close on November 6 (local time)).

Valuation is not cheap but declining.

Valuation as of November 5 is not cheap.
The valuation of ARM is as of November 5th.(Note: JSR, excluding the chemical sector constituents of the Nikkei Semiconductor Stock Index (in weight order). Operating profit growth rate forecast, recent dividend yield, and analyst target stock price for Nippon Chemicals are based on Bloomberg data.)The Price Earnings Ratio (PE) is approximately 74 times which has decreased to a level slightly above the past 1-year average (73 times). Last timeDuring the earnings report of 83 timesIt was traded at a level above the average, at 83 times, so there was a sense of overvaluation. However, the current PE of 74 times is lower than other AI-related stocks (for example, $NVIDIA (NVDA.US)$ Is approximately36 times), and it cannot be said to be undervalued, indicating that expectations for the company's AI remain high.

As of November 5th,average target stock price(※1) is $142.58. There is one week until the earnings reports date indicated by options trading.Stock price volatilityIt is currently at 11.1% (*2), slightly higher than the last earnings report (10.6%). High volatility is expected with the earnings announcement.
(※1 and ※2: both from Bloomberg)