Arm Holdings (ARMH) shares dropped sharply post earnings last week. Commentators have attributed the drop to various aspects of the earnings release for example "guidance that disappointed", "concerns of smartphone slowdown" and one report even linking the stock drop to "solid performance".
The reality, however, is that earnings met analyst expectations, were in line with previous company guidance, and forward guidance on the earnings call was positive. To remove any lingering suspicions that the stock dropped on earnings, consider that ARM released results before the UK Market open on Tuesday. and after the London market opened, the stock was trading higher, reaching all-time highs. So what´s really going on?
Other companies such as TriQuint (TQNT) and Broadcom (BRCM) are reporting results with "strong mobile demand" and "higher-than-anticipated sales of cellular system-on-chip (SOC) and touch controllers." More famously, Apple (AAPL) has announced record sales for its ARM-inside iPhone 5S model introduced last month. Investors and analysts already knew that ARM reports royalty revenue a quarter in arrears, so any gains from iPhone 5S sales will not start to be seen until ARM´s next quarterly report and were not expected to be a factor in this report.
The real event was not the earnings announcement from Cambridge, England, but the events in Cupertino on the same day. Apple were making a number of product launches, and there had been speculation ARM would be a big winner...
One speculation making the rounds was that the iPad might feature a quad core version of the A7 64-bit CPU that debuted last month in the iPhone 5S. In fact the iPad was equipped with the exact same A7 found in the iPhone.
Now, while doubling the number of CPU cores in a product already using an ARM CPU would have increased royalty revenue per iPad, a far bigger, and more profitable, coup for ARM would have been a high profile design win, displacing a major competitor. At the iPhone launch event in September, Apple described the iPhone´s A7 chip as "desktop class." This has led to speculation that Apple would be announcing desktops and laptops using ARM where previously it used Intel (INTC) processors. This pipedream did not come to pass either.
On a more speculative angle, the Lumia RT tablet, also announced Tuesday, featuring a 32-bit ARM CPU may have disappointed some ardent ARM optimists who may have been hoping for a 64 bit tablet CPU. This would have turned the Apple A7 development from a one-off into a new trend. But considering the approximately year-long negativity linked to Windows 8 RT and Windows 8 in general, the Apple disappointment factor was the main cause of the ARMH stock losses.
Conclusion: When the iPhone 5s was revealed in September along with its 64-bit A7 chip, ARMH stock received a nice boost. Investors were hoping for a similar boost from last week´s Apple event, and ran the stock up in anticipation. When no ground breaking use of ARMH technology was forthcoming, the stock backed down. The earnings release on the same day was not a factor in the drop. In fact, the timing of the release and the ticker show that the earnings release was a positive for the stock.
(Footnote: This article made the point that the earnings call and guidance were in fact positive. Possibly this got mulled over and factored in by the market eventually, as ARMH has since recovered roughly half of its post-earnings... er... post-Apple drop)