The replica of the ARM is an electronic chip board during a collaborative ceremony launching a partnership between Malaysia and ARM Holdings in Kuala Lumpur, Malaysia, on March 5, 2025.
Shares of Qualcomm also nosedived 9.68% after hours Wednesday. While the company's fiscal first-quarter results beat expectations, its forecast disappointed due to a global memory shortage.
Andrew Jackson, an equity analyst at Ortus Advisors, said that investors were also reacting to Arm's guidance only slightly beating estimates, as well as a poor outlook delivered by its chip design customer Qualcomm.
Arm's fiscal third-quarter licensing revenue rose 25% from a year earlier to $505 million, but came in 2.9% below the $519.9 million expected by analysts surveyed by FactSet.
Despite missing Wall Street estimates for licensing revenue, Arm posted record quarterly revenue of $1.242 billion for the last three months of 2025, driven by artificial intelligence demand. That figure beat LSEG SmartEstimates, which are weighted toward forecasts from analysts who are more consistently accurate.
Arm's chip designs power most of the world's smartphones and are increasingly used in AI data centers and edge computing devices.
"ARM is trying to diversify into AI chips used for DC/servers, but the success of this remains uncertain, and its business model is still heavily reliant on royalties from chips used in consumer products such as handsets," Jackson said.
If Chinese smartphone production declines next year because of memory shortages, as Qualcomm suggested, Arm's outlook could worsen before improving, he added.
Shares of Arm, which went public in 2023, have also faced broader tech market pressures in the lead-up to earnings and are down 4% year-to-date.