FILE PHOTO: A smartphone with a displayed Arm Ltd logo is placed on a computer motherboard in this illustration taken March 6, 2023. REUTERS/Dado Ruvic/Illustration/ File Photo
(Reuters) -Arm Holdings shares tumbled nearly 13% in early trading on Thursday as the chip tech provider's plan to invest in its own chip development, which would bite into future profits, disappointed investors.
The company's decision to ramp up investment in chip creation marks a significant pivot from its legacy business model of licensing intellectual property to the likes of Nvidia and Amazon, which already design their own chips.
This new chip strategy positions it to compete with its own customers and could lead to conflicts of interest, J.P. Morgan analyst Harlan Sur said.
"The (Arm) team remains focused on system-level, software, and AI initiatives. However, we are increasingly concerned with its strategy to develop full chip solutions," Sur said.
Arm forecast fiscal second-quarter profit slightly below Wall Street estimates, as escalating global trade tensions threaten demand in its core smartphone market, disappointing investors who had driven the stock sharply higher in recent months.
Arm has jumped 150% since its stock market debut in 2023, and has risen 32.4% so far this year, compared with gains of about 34% for Nvidia and 49% for AMD.
The shares trade at over 80 times the earnings estimates, much higher than rivals Nvidia's 34.91 and AMD's 35.33.
Arm's subdued forecast highlights the uncertainty facing global manufacturers and supply chains amid ongoing U.S. trade tensions.
At least nine brokerages raised their price targets on the stock, while two lowered theirs, bringing the median to $155, according to data compiled by LSEG.
The company's shares were last down 12.6% at $142.75.
(Reporting by Akriti Shah in Bengaluru; Editing by Mrigank Dhaniwala and Savio D'Souza)
