AI Impact on Chip Demand Dims Outlook for Arm, Qualcomm

Shares of Arm Holdings (ARM) and Qualcomm (QCOM) declined after their earnings forecasts indicated the absence of a significant AI-driven surge in demand for consumer devices utilizing their chips. ARM lost 3.3% and Qualcomm dropped 3.7%.

Earnings Highlights

Both semiconductor companies reported Q4 results surpassing market expectations. However, their forecasts for the current period dampened sentiment, revealing investor impatience for AI to boost demand for smartphones and PCs, thereby increasing revenue for Arm and Qualcomm.

ARM's guidance for the March quarter fell slightly short of expectations, with adjusted earnings per share estimated at $0.48-$0.56 versus the anticipated $0.53. Revenue is projected to range from $1.18 billion to $1.28 billion, compared to the expected $1.23 billion. Additionally, Arm reduced the upper range of its revenue outlook for fiscal year 2025 to $4.04 billion, but raised the lower range to $3.9 billion.

Factors Impacting Guidance

Arm's guidance raised concerns about a slowdown in AI infrastructure spending. Cheaper AI models could reduce the cost of AI applications, leading to increased demand for smartphones and PCs. However, this cost-effectiveness may also result in reduced spending by cloud providers on AI chips for data centers.

Qualcomm's revenue outlook for its smartphone chip segment showed growth slowing in the March period. The handset segment experienced a 13% revenue increase to $7.6 billion in the fiscal first quarter ended December 31st. However, CFO Akash Palkhiwala predicted a 10% growth for the current quarter.

AI as a Potential Catalyst

Analysts suggest that an AI-driven demand cycle for smartphones could bolster the companies despite their cautious outlooks. Lower-cost AI models are expected to drive the spread of inferencing at the edge, benefiting Arm's demand for more powerful v9 cores and increased demand for Arm-based devices.

However, Citi analyst Christopher Danely expressed skepticism, believing that a handset upgrade cycle is at least a year away due to the lack of a compelling "killer app."

Cautionary Outlook

Despite Arm's dip, its shares have risen nearly 130% over the past year. Qualcomm's gain is a more modest 17%. However, concerns about a slowdown in AI spending and the uncertain timing of an AI-driven demand wave for smartphones warrant caution.