Shares of Arm Holdings tumbled in extended trading on Wednesday after the semiconductor designer narrowly missed Wall Street expectations on licensing revenue, overshadowing an otherwise strong quarter fueled by artificial intelligence demand. The stock fell about 7.5% after hours, wiping out billions in market value and adding to pressure already building across the chip sector.

The UK-based company reported fiscal third-quarter licensing revenue of $505 million, up 25% from a year earlier but roughly 3% below the $519.9 million analysts had forecast. While the shortfall was modest, investors appeared more focused on Arm’s forward guidance and a weak outlook from key customer Qualcomm, which intensified concerns around smartphones and supply chain constraints.

Qualcomm shares sank nearly 9.7% in after-hours trading despite beating expectations for its fiscal first quarter. The company cited a global memory shortage as a major headwind, warning that constrained component supplies could dampen demand across the mobile ecosystem in coming quarters.

AI Boom Lifts Total Revenue to Record High

Even with the licensing miss, Arm delivered a standout top-line performance. Total revenue for the quarter reached a record $1.242 billion, driven by accelerating adoption of Arm-based chips in artificial intelligence workloads. The figure surpassed consensus estimates tracked by LSEG SmartEstimates, which place greater weight on analysts with stronger forecasting accuracy.

Arm’s architecture underpins the vast majority of the world’s smartphones, but its presence in data centers and edge computing has been expanding rapidly as cloud providers and AI developers seek more energy-efficient alternatives to traditional x86 processors.

Major hyperscalers and chipmakers, including Amazon, Nvidia, and Ampere, have increasingly turned to Arm designs for AI servers, helping push quarterly revenue to its highest level since the company’s return to public markets in 2023.

Guidance and Qualcomm Outlook Rattle Investors

Market reaction, however, went beyond a single revenue line item.

Andrew Jackson, equity analyst at Ortus Advisors, said investors were responding to a combination of factors: Arm’s guidance only slightly exceeding expectations and Qualcomm’s downbeat forecast tied to memory shortages. Together, these signals reignited fears of a broader slowdown in consumer electronics.

Qualcomm warned that limited availability of key memory components could force smartphone manufacturers to scale back production volumes. That risk directly impacts Arm, whose royalty and licensing income remains closely tied to handset shipments.

Arm’s chip blueprints are embedded in nearly every major smartphone platform, making mobile devices its single largest end market. According to industry estimates, smartphones still account for roughly 50% of Arm’s total revenue, even as data center exposure continues to grow.

Smartphone Dependence Remains a Structural Risk

While Arm is actively pushing deeper into AI servers and enterprise infrastructure, analysts caution that its business model is still heavily anchored to consumer devices.

“Arm is trying to diversify into AI chips used in data centers and servers, but the success of this transition is not guaranteed,” Jackson said. “Royalties from handsets and other consumer products remain the backbone of the company.”

He added that if Chinese smartphone production weakens further due to ongoing memory shortages, Arm’s near-term outlook could deteriorate before stabilizing later in the year. China remains one of the world’s largest smartphone manufacturing hubs, and any sustained pullback there would ripple through the global semiconductor supply chain.

Rolf Bulk, an analyst at Futurum Group, noted that reduced handset output would also weigh on Arm’s biggest customers, including Apple and Samsung, both of which rely heavily on Arm-based processors across their product lines.

Executives at both Arm and Qualcomm have acknowledged that device makers are becoming more cautious, reassessing inventory levels and delaying production plans as component constraints persist.

Broader Tech Pressures Add to Volatility

Arm’s selloff also comes against the backdrop of wider volatility in technology stocks. Investors have been increasingly selective in recent weeks, demanding not just strong results but also clear visibility into future growth.

Since its 2023 IPO, Arm has been viewed as a bellwether for both the smartphone industry and the emerging AI hardware cycle. While enthusiasm around artificial intelligence has helped lift valuations across the semiconductor space, any signs of weakness in traditional end markets like mobile devices tend to trigger sharp reactions.

Heading into earnings, Arm shares were already under pressure and are now down roughly 4% year to date, reflecting growing unease about how quickly AI momentum can offset softness in consumer electronics.

Looking Ahead

Arm’s latest results highlight a company in transition. On one hand, AI demand is driving record revenues and expanding its footprint in data centers. On the other, its heavy reliance on smartphones leaves it vulnerable to supply disruptions and cyclical downturns in consumer tech.

For investors, the key question is whether Arm can accelerate its shift toward AI and enterprise markets fast enough to reduce that dependence. Until then, licensing hiccups, cautious guidance, and signals from major partners like Qualcomm are likely to keep the stock volatile, even as the long-term AI story remains intact.

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