Ticker Reports for August 5th
Arm Holdings: Does the 42% Drop Signal an AI Buying Opportunity?
Arm Holdings (NASDAQ: ARM) stock plummeted on its fiscal Q1 2025 earnings results as investors were treated to a nasty dose of reality concerning the artificial intelligence (AI) boom. The company designs, develops, and licenses semiconductor architectures. It doesn’t manufacture or produce chips. Instead, it collects licensing fees and royalties on its architectures and IPs. This makes it the ultimate asset-light business.
Hot Expectations Face Cold Reality
The rollout of its ARMv9 architecture came with lofty expectations, enabling devices to perform artificial intelligence (AI) on the edge. Rather than sending queries to a central server, AI applications would process directly in the device. This sent shares up to $188.75 on July 9, 2024, as investors let their imaginations run wild about the potential upside. Unfortunately, shares have plunged over 42% in less than a month as the promise of outsized growth may have been over-assumed. On the other hand, this could be an overreaction presenting a buying opportunity. Arm's results were very strong. However, the market was overzealous in its valuation, with shares trading over 90x fiscal full-year 2025 EPS estimates.
Arm Holdings operates in the computer and technology sector, competing with chip makers like Intel Co. (NASDAQ: INTC), Samsung Electronics (OTCMKTS: SSNLF), and Texas Instruments Inc. (NASDAQ: TXN).
Arm Holdings Dominates with a 99% Market Share of Mobile Chips
When thinking about market-dominant companies, names like Taiwan Semiconductor Manufacturing Co. Ltd. (NYSE: TSM), with a 62% market share of the global foundry market, or NVIDIA Co. (NASDAQ: NVDA), with a 94% market share of AI chips, come to mind. ASML Holdings has over a 90% market share of the ultraviolet (UV) lithography market. However, these companies pale in comparison to the 99% market share dominance in mobile chips that Arm Holdings commands.
Arm’s legacy architecture makes CPUs extremely energy efficient compared to x86 architecture. Mobile devices like smartphones rely on optimizing the limited battery power. Arm’s next-generation v9 architecture enables edge AI with its power-efficient compute platform, which requires even more power to operate and, thus, better energy efficiency.
ARM Stock Triggers a Head and Shoulders Breakdown
The daily candlestick chart for ARM illustrates a head and shoulders breakdown pattern. This pattern is comprised of three peaks. The left shoulder peaked at $177.31 and pulled back to the neckline at $149.50. The head has the highest peak at $188.75, and it is pulled back to the neckline at $152.22. The right shoulder is the final peak at $172.36, which triggered the breakdown through the neckline. The neckline breakdown occurred when ARM fell under $154.30 on July 26, 2024, ahead of its July 31, 2024, earnings release. The fiscal Q1 2025 results accelerated the selling, causing shares to plunge another 21% in the following days. The daily relative strength index (RSI) has plunged to the 31-band. Pullback support levels are at $102.09, $94.00, $85.61, and $77.71.
Arm Holdings Q1 2025 Earnings Results Were Great, But Royalty Revenues Lagged
The company reported fiscal Q1 2025 EPS of 40 cents, beating consensus estimates by 6 cents. Revenues surged 39.1% YoY to $939 million, beating $905.52 consensus estimates. License revenues surged 72% YoY to $472 million, but royalty revenues were up just 17% YoY. Licensing fees are the upfront payment that all customers pay, followed by royalties for each chip they produce. The royalty payments are the recurring element that analysts were underwhelmed by as they are the most important figures in the long term.
One-Two Punch to the Gut on Horrible Intel Earnings Report
Arm Holdings shares tumbled 15.7% following its earnings results. However, a sizeable earnings miss and guidance cut from Intel Co. (NASDAQ: INTC) caused further selling in the chip sector, adding another 6% loss to Arm shares. The positive sentiment in AI and the semiconductors took a 180-degree turn as investors signaled their anger that the lofty expectations for the AI boom may have been overstated.
A Buying Opportunity Emerges for Patient Investors Driven by ARMv9
However, the jump in licensing revenues almost assures that royalty revenue will rise as its chip company customers produce more chips using ARM architecture. It’s also important to note that its ARMv9 architecture pays nearly double the royalty rate of its legacy architectures. In other words, this may be a case of short-term pain for long-term gain. It can take months to several years to go from licensing payment to royalty collection due to the complexity of the chip design. Arm shares have fallen from trading at 92x 2025 EPS targets to 69x.
ARMv9 adoption continues to accelerate, accounting for 25% of royalty revenue, up from 20% in the previous quarter. Arm licensed ARMv9 to Alphabet Inc. (NASDAQ: GOOGL) Google’s Axion Processor and Amazon.com Inc. (NASDAQ: AMZN) AWS Graviton4 and enables Edge AI for Microsoft Co. (NASDAQ: MSFT) Windows Copilot.
Arm Takes a Conservative Approach to Guidance
Arm Holdings provided in-line guidance for fiscal Q2 2025 EPS of 23 cents to 27 cents versus 27 cents consensus estimates. Revenues for Q2 2025 are expected to be between $780 million and $830 million. It reaffirmed the full-year 2025 EPS of $1.45 to $1.65 versus $1.57 consensus estimates. Full-year 2025 revenues are expected to be between $3.8 billion and $4.1 billion versus $3.99 billion.
Arm Holdings CEO Rene Hass commented, “Now our long-term growth drivers remain consistent. Every chip being designed today requires a CPU and these are being designed with Arm in mind with our strong tie into all the world's software. Now, that has driven significant royalty revenue growth. More value per chip, v9 up to 25% now royalty revenue overall, that's up 20% from the previous quarter. More importantly, our smartphone royalty revenue was up 50% year-on-year. That's against a single-digit increase in units.”
Arm Holdings analyst ratings and price targets are at MarketBeat. There are 27 analyst ratings on ARM stock, comprised of 15 Buys, 10 Holds, and two Sells.
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Texas Roadhouse Stampedes On EPS Beat as Comp Sales Surge 9.3%
Casual dining restaurant operator Texas Roadhouse Inc. (NASDAQ: TXRH) is an anomaly among dine-in restaurants. It continues to post impressive results, as evidenced by its solid Q2 2024 earnings report. The steakhouse-style restaurant chain continues to impress with its consistent growth metrics. Particularly outstanding is its 9.3% YoY same-store sales (SSS) growth in its latest quarter. This metric alone outshines some of the most well-known restaurant chains in the country.
Texas Roadhouse operates in the consumer discretionary sector and competes with restaurant operators Darden Restaurants Inc. (NYSE: DRI), Brinker’s International Inc. (NYSE: EAT), and Bloomin’ Brands Inc. (NASDAQ: BLMN).
Texas Roadhouse Is Truly an Anomaly
Texas Roadhouse prides itself on its fresh, made-from-scratch sides and sauces, including bacon bits, croutons, and dressings. Its iconic buns are baked fresh every five minutes and served with honey cinnamon butter. Its hand-cut steaks are always fresh and never frozen, cut by an in-house butcher. It has all the makings of an expensive premium steakhouse without the expensive décor and furnishings. As customers walk into the restaurant, they can see the meat on display and actually pick which steaks they want for their meal.
It's a testament to how well management operates this chain, separating itself from the pack even among steakhouses. Texas Roadhouse is a rare anomaly of premium food served at a value. It's like Michael Porter's Theory of Competitive Advantage morphed into one strategy where a premium product is sold under a low-cost distribution strategy.
Same-Store Sales Growth Is the Barometer For Restaurant Operators
The metrics speak for themselves. Same-store sales, also referred to as comparable sales, are data that gauge how well a restaurant is growing. Chipotle Mexican Grill Inc. (NYSE: CMG) is the king of the mountain among fast casual dining restaurants, with a whopping 11.3% SSS growth in its latest quarter. Sweetgreen Inc. (NYSE: SG) impressed analysts with its 5% SSS growth in its Q1 2024 report. CAVA Group Inc. (NYSE: CAVA) was only able to squeeze out 2.3% SSS growth in its recent quarter.
Among casual dine-in restaurants, Texas Roadhouse is the king of the mountain, with 9.3% SSS growth in Q2 2024. This is compared to the world's largest restaurant operator, Darden Restaurants, which posted 4% SSS growth in its recent quarter. Olive Garden posted SSS growth down 1.5%. Longhorn Steakhouse posted only 4% SSS growth, while Bloomin Brands-owned Outback Steakhouse saw SSS fall 1.2% in Q1 2024. Even premium fine dining establishment Fleming’s Prime Steakhouse & Wine Bar saw SSS fall 2%.
TXRH Stock is Forming a Bullish Megaphone Pattern
The daily candlestick chart for TXRH is forming a rare bullish pattern called a megaphone. This pattern forms from an upper trendline resistance comprised of higher highs and a lower trendline comprised of lower lows as the trading channel widens. The breakout triggers when shares surge through its upper trendline resistance. The daily relative strength index (RSI) has fallen to the 43-band. Pullback support levels are at $162.40, $158.06, $151.11, and $146.79.
Texas Roadhouse Smokes Consensus Estimates
The company reported Q2 2024 EPS of $1.79, beating consensus estimates for $1.64 by 15 cents. Revenues matched consensus estimates at $1.34 billion. Restaurant margins rose to 18.2%, up from 15.7% in the year-ago period, driven by higher average guest chat and improved labor productivity offsetting wage and other labor inflation of 4.4% and commodity inflation of 0.4%.
Average weekly sales at company restaurants were $158,991, of which $19.975 were to-go sales, compared to $146,727 and $18,496, respectively, in the year-ago period. Comparable restaurant sales or same-store sales increased 9.3% YoY at company restaurants and 8.3% at franchised restaurants. The company opened six new companies and three new franchise restaurants in the quarter.
Texas Roadhouse's Full Year 2024 Outlook
Texas Roadhouse provided its full-year 2024 outlook. Comparable sales for company-owned stores rose 8% YoY in the first four weeks of Q3 2024. Store week growth is expected to be around 7.5%, which includes the benefit of 2% from a 53rd week. Commodity cost inflation is expected to be around 2%. Total capital expenditure is expected to be between $360 million and $370 million. Wage and labor inflation is expected to be between 4% and 5%.
Texas Roadhouse CEO Jerry Morgan commented, "We continued our momentum in the current quarter as strong traffic trends and some relief on commodity inflation led to increased profitability across all of our brands. With our operators delivering solid operating results and a balanced development pipeline, we are well positioned for the second half of the year."
Texas Roadhouse analyst ratings and price targets are at MarketBeat. There are 22 analyst ratings on TXRH stock, comprised of 10 Buys and 12 Holds, with a 2.24% upside to the average consensus price target of $169.86.
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Why Warren Buffett Just Sold Half His Stake in Apple Stock
Financial markets across the globe are going on a break, an undefined and unmeasured break. Warren Buffett released his quarterly holdings over the weekend. The record cash holdings of over $218 billion for Berkshire Hathaway Inc. (NYSE: BRK.A) isn’t the most exciting thing investors can focus on when pouring over the release. What was once one of Buffett’s largest holdings has now been cut in half, and the message behind it is just as important as the sale.
Shares of Apple Inc. (NASDAQ: AAPL) are selling off by as much as 5% to start the trading week after the news release. Buffett sold 50% of his shares in the technology stock giant, and he quoted that the reasoning came mostly from a tax-efficient perspective. However, this is the soundbite that investors want to repeat in order to remain calm; the truth may be a lot different.
The stock market rotation is now well underway, as capital is starting to flee the technology sector and go into other spaces like bonds and commodities like gold. In fact, the iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT) is up by over 1.2% on a day when the S&P 500 is down by roughly 3.7%. More than that, gold prices are now hovering near an all-time high, showing the market rotation is here to stay. Despite all the noise, here’s what investors can focus on to navigate this environment.
Buffett’s View is Alarming, But Also Spells Opportunity for Investors
The reason for the selling was pointed to Buffett's future view of tax rates for capital gains, reasoning that the government would raise these rates to close down on widening budget and trade deficits. Taking some profits off the table today (at lower tax rates) rather than tomorrow (at higher tax rates) makes sense.
However, Buffett is not known nor fond of timing the market, at least the economy. At the same time, other portfolio choices reveal what his actual view of the market might be. After buying up to 29% of Occidental Petroleum Co. (NYSE: OXY) in a nine-day buy streak, Buffett's optimism on the energy sector might tell investors all they need to know.
Higher oil prices will strengthen the energy sector, as analysts at Goldman Sachs expect them to reach $100 a barrel this year. However, commodities can only rally on perceived dollar weakness, and Buffett would be right to expect this.
More than that, Buffett also sold out of some of his Bank of America Inc. (NYSE: BAC) stake, as reported over the weekend. By taking a less optimistic view of the financial sector, he is doubling down on the coming dollar weakness and consumer environment for the United States economy.
Apart from all the selling and worrying, investors can look at the opposite end of the spectrum for opportunities. The infamous yield curve is now moving back to positive territory, an indicator that is 100% accurate in predicting rallies in the energy sector. This reiterates Buffett's view on the space.
Wall Street Analysts Support the Rotation and Recommend It
Looking at forecasts for earnings per share (EPS) growth in the next 12 months, namely between the technology and energy sectors, can give investors a much deeper insight.
Occidental Petroleum's EPS growth expectations are set at 32.2%, whereas Apple analysts only forecast EPS growth of 12.2% today. If, in fact, there could be dollar weakness, investors should stick with the companies that promise above-average growth.
Royal Gold Inc. (NASDAQ: RGLD) is another company helping Buffett's thesis. The gold miner is also getting some attention from Wall Street analysts today. Forecasting up to 24.9% EPS growth shows a better future for investors who are still hanging on to the artificial intelligence hype of yesterday.
Remembering that bonds could also be an attractive investment, especially if the Federal Reserve (the Fed) ends up cutting interest rates, investors shouldn't be surprised to see Stanley Druckenmiller sell out of NVIDIA Co. (NASDAQ: NVDA) and reallocate into the bond ETF mentioned above.
One last check for investors keeping up with Buffett's report: Why hold so much cash? This includes not only cash balances but also new liquidity found through selling Bank of America and Apple stock.
Buffett has historically held larger amounts of cash when he sees no buying opportunities in the market, and that means good news for investors sitting on the sidelines waiting for all the potentially good deals that will come if the S&P 500 selloff accelerates.
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