Stock prices for the AI chip manufacturer falter after their earnings projections fail to meet investor expectations
Arm Holdings, a leading semiconductor intellectual property (IP) company, reported its first-quarter results for fiscal year 2026, showing a record high revenue of $1.05 billion, a 12% increase year-over-year. However, the company's guidance for the second quarter has fallen short of Wall Street expectations, leading to a significant drop in Arm's stock price.
The Q1 revenue slightly beat expectations, with analysts predicting $1.04 billion, while the adjusted EPS came in line with forecasts at $0.35. Despite these positive results, the midpoint of the Q2 revenue guidance is around $1.06 billion, slightly below analyst estimates of ~$1.09 billion. Similarly, the Q2 adjusted EPS guidance midpoint is below expectations, at ~$0.34 compared to the anticipated ~$0.42.
Investors were further disappointed by Arm's decision not to issue full-year fiscal 2026 guidance due to uncertainty in the global trade and economic environment. This decision added to investor caution, contributing to the stock's decline by about 8.6% in after-hours trading.
The increased operating expenses, primarily due to an increase in engineering headcount, also weighed on margin expectations for Q2. Moreover, the market sentiment has shifted from strong confidence to a more cautious or mixed outlook, partly because some customers are moving from off-the-shelf licensing to custom designs, making future growth less predictable.
Despite the stock drop, Arm's Q1 results showed strength in various sectors. Royalty revenue grew across all target end markets in Q1 FYE26. The ramp-up of chips based on Arm's computer subsystems (CSS) and increased usage of Arm-based chips in data centers contributed to the growth in royalty revenue. Arm's Q1 FYE26 revenue exceeded $1 billion for the second straight quarter.
Arm's Q1 adjusted EPS result and Q2 adjusted EPS guidance are not good enough to support a stock valued this richly. As of the close of Wednesday's regular trading session, Arm stock was priced at 89 times Wall Street's estimated forward adjusted EPS.
Despite the recent setback, Arm remains a stock worth watching and considering buying during pullbacks. The company's strong position in the semiconductor industry and its role in powering the surging artificial intelligence (AI) workloads in data centers make it an attractive investment opportunity.
Sources: [1] Arm Holdings Q1 2026 Earnings Release [2] Reuters: Arm Holdings Q1 2026 Earnings Report: What to Expect [3] Seeking Alpha: Arm Holdings Q1 2026 Earnings Preview [4] Yahoo Finance: Arm Holdings Q1 2026 Earnings Call Transcript
- The increased spending on engineering, particularly in headcount, may affect the second quarter's margin expectations, given the company's decision to invest in technology to stay competitive in the semiconductor industry.
- Amid uncertainty in the global economy and trade, Arm Holdings declined to provide full-year fiscal 2026 guidance, leading investors to exercise caution and sell off the stock, causing a drop in price.
- Arm's Q1 results, showing a surge in royalty revenue from sectors like consumer, automotive, and data center, indicate potential for continued investing in these areas, given the growth in AI workloads and the ramp-up of chips based on Arm's computer subsystems (CSS).
