Arm FQ4 25 – Mean Reversion

Worries have already evaporated

• Arm reported good results but guided weakly as a result of trade issues which already look like they will not come to pass which is why the shares have already put back all of what they lost last week.
• Q4 revenues / Adj-EPS were $1.24bn / $0.55, just ahead of estimates of $1.23bn / $0.53.
• This represented YoY growth of 33.7% in revenue and 53% in adjusted-EPS, mainly due to operating expenditure, which grew by 11% YoY, allowing operating leverage to improve profitability.
• Once again, the main story is the migration from v8 to v9 where v9 carries higher royalties underpinning Arm’s outperformance of the underlying markets that it serves.
• For example, smartphone royalties increased by 30% YoY despite the actual number of devices shipped increasing by just 2%.
• Data centre and automotive also performed well, and Arm is forecasting that 50% of all chips shipped into data centres during FY2026 will have an Arm core in there somewhere.
• The best example of this is Nvidia, where the CPU part of the Blackwell system is powered by Arm, which runs the system and ensures that the GPUs do their job as efficiently as possible.
• These good results were tempered by cautious guidance where the mid-point was below expectations and where the company declined to guide for the full year.
• Here, FQ1 26 revenues / Adj-EPS are expected to be $1.00bn – $1.10bn / $0.30 – $0.38, very slightly weaker than consensus at $1.06bn / $0.36.
• The company also declined to guide for FY 26 as a result of the global trade and economic picture, which is now looking meaningfully better with the USA and China agreeing to pause the most aggressive tariffs for 90 days while a longer-term deal is hammered out.
• I think that this is not due to the risk of direct tariffs on Arm but more about the impact that a trade war would have on the economy more widely and sales of the devices from which it derives its revenue.
• This adds significant weight to the view that the US administration is heading towards reciprocal tariffs and free trade as opposed to tariffs for tariffs’ sake.
• Assuming that this trajectory continues, I would expect Arm to beat the guidance it has given for the coming quarter and to reinstitute annual guidance at its FQ1 26 results in August.
• Consequently, while the v8 to v9 transition and the diversification into PCs, data centre and automotive continue, the company should be able to grow faster than its underlying markets.
• Arm still has a high PER ratio standing at 68.7x FY2026 PER although this is meaningfully below where it has been for much of 2024 (>100x), and so the trends from which Arm is benefiting can be more cheaply purchased by investing in its customers, such as Qualcomm, MediaTek and even Nvidia.
• This is where I continue to have a position, although the outlook for Arm remains pretty good for FY 2026 and FY 2027.