Can chip designer Arm impress following a sales slowdown?

Wall Street darling Arm is set to report fourth quarter earnings on Wednesday amid a slowdown in sales and growing concern it is overvalued.

Shares in the Cambridge-based chip designer have soared 60 per cent over the past year as investors have piled in on one of the newest admissions to New York’s Nasdaq exchange.

In February, Arm hammered analyst estimates for its third-quarter earnings, prompting the stock to double in three days. This was despite it reporting a slowdown in earnings and sales.

Revenue rose just 14 per cent year on year to $824m (£655m), down from a 28 per cent rise the previous quarter, while net income halved to $87m (£69m).

In its fourth quarter, analysts expect Arm to post revenue of $878m (£698m). Arm recently raised its revenue guidance for the fourth quarter to between $850m to $900m, far north of the consensus estimate at the time of $780m.

It said this was because it foresees several “fundamental trends” to continue, such as increasing demand for technology driven by artificial intelligence (AI), which supports its licensing revenue.

Arm, which counts Apple, Nvidia and Qualcomm as major customers, designs and licenses high-performance central processing units (CPUs), a type of semiconductor chip that enables computers to run their operating system and applications.

As of the most recent trading update, licensing revenue made up 43 per cent of Arm’s total revenue while royalties accounted for 57 per cent, largely thanks to a recovery in the smartphone market.

But some have expressed doubts over Arm’s AI potential, as it specialises in the CPUs used in smartphones rather than the GPUs that AI systems rely on, such as those designed by US giant Nvidia.

Investment research firm Morningstar recently said Arm is overvalued due to a lack of substantial research and development (R&D) investment and it will fail to reach the headier heights of its larger American rival.

“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.

Chip designer Nvidia’s top line grew 265 per cent year on year to $22.1bn (£17.6bn) in its most recent quarter while its profit mushroomed 769 per cent.