Arm shares droop as US-listed British chip designer misses ‘thin’ margin for error

British chip designer Arm has taken a beating, with shares sagging nearly nine per cent in pre-market trading on Thursday after its full year forecast disappointed investors.

The New York listed company said it expects full year revenue between $3.8bn (£3bn) and $4.1bn (£3.3bn), with a midpoint of $3.95bn (£3.16bn). This is slightly below the consensus estimate of $3.99bn (£3.2bn), according to LSEG data.

“Valuations and expectations are often pitched high in the States, particularly for a firm like Arm which has exposure to the all-conquering AI theme and this means the margin for error is extremely thin,” explained Russ Mould, investment director at AJ Bell.

“Arm’s model of licensing its designs and collecting royalties on them allows it to generate high margins and grow without employing lots of extra capital, but it does come with a slight catch in that the timing of licensing deals can be unpredictable,” he added.

Recently, investment research firm Morningstar warned that Arm is overvalued and it needs to “drastically hike” its royalty rates by fivefold over eight years in order to justify its current share price. But this could risk customer loss to competitors and jeopardising its position in the market.

“Although semiconductor ecosystem providers like Arm will benefit from AI, they won’t do it to the same extent as Nvidia given less operating leverage and pricing power,” Morningstar said.

Arm’s chips are used in the majority of the world’s smartphones but they are also increasingly being used in data centres and artificial intelligence (AI) models. It has seen a boost in revenue thanks to soaring demand for AI across the global economy.

Arm said its fourth quarter revenue grew 47 per cent to $928m (£743m), ahead of analyst estimates of $878m (£698m).