Q4 2023 earnings scorecard and Arm bonanza

Arm shares are defying financial gravity

The big winner yesterday was the chip design company Arm that went public last year. Arm reported better than expected earnings and listed its earnings guidance driven by huge demand for AI and smartphone makers putting more cores into phones. The company guides fiscal Q4 (ending 31 March) revenue of $850-900mn against estimated of $778mn. According to Arm management the AI boom is not hype and the cycle has just begun and is the most transformational technology of our lifetime. One of the key drivers going forward is that a lot of its customers are shifting to a new technology version called V9 which comes with almost double royalty rate. Arm’s IP is used in electric vehicles, smartphones, TVs and cameras. While Arm is naturally talking their book, which any investor should take with a grain of salt, the strong guidance was strong and instrumental in lifting sentiment.

However, it is important to recognize as an investor that the expected growth rate is “only 22%” in the fiscal year that ends in March 2025 and that the company is already at around 40% net profit margin. Investors are right willing to pay more than 2x forward operating earnings of that Nvidia which is one of the most hyped large cap stocks in the world. Arm is an impressive company but when valuations reaches these levels investors should be cautious. The 2021 technology hype cycle is a stark reminder of this.

Recent notes on equities

Tesla earnings review: Between two mountain tops?