SoftBank Shares Decline Following Arm’s Licensing Shortfall

Shares in SoftBank Group faced selling pressure on Thursday, driven by a disappointing quarterly update from its majority-owned subsidiary, Arm Holdings. The British chip designer's results revealed a critical weakness in its licensing division, a development that immediately impacted the Japanese technology investment firm.

For its fiscal third quarter, Arm reported a 26% year-over-year revenue increase to $1.24 billion. However, a closer examination of the figures highlighted a significant concern. Revenue from licensing, which Arm generates by providing access to its chip architecture and technology, came in at $505 million. This figure fell short of Wall Street's projections.

Key Financial Highlights from Arm's Report:

• Total Revenue: $1.24 billion (a 26% year-over-year increase)
• Licensing Revenue: $505 million (below analyst forecasts)
• Royalty Revenue: $737 million (up 27%, a record high)
• Adjusted Earnings: Slightly exceeded expectations

The licensing segment's underperformance stood in contrast to the strength seen in royalties. Revenue from royalties, which are fees paid for each chip sold containing Arm technology, surged 27% to a record $737 million. This growth was fueled by robust demand linked to artificial intelligence (AI), data centers, and smartphone markets.

Should investors sell immediately? Or is it worth buying SoftBank?

Sector-Wide Jitters Add to Pressure

The letdown in licensing earnings overshadowed these positive elements, causing Arm's stock to drop in after-hours trading and pulling SoftBank lower. The broader technology sector also experienced weakness on Thursday, compounding the issue. Growing uncertainty surrounding the AI market landscape served as an additional headwind.

The timing is challenging for SoftBank, which also holds a stake in OpenAI, as competition in the AI space intensifies. Rivals like Google are ramping up their efforts. Arm's performance is particularly crucial for SoftBank following the chip designer's return to public markets in 2023.

Strategic Initiatives Proceed Amid Volatility

Despite the market turbulence, SoftBank continues to advance its broader technology strategy. In early February, its subsidiary SAIMEMORY announced a collaboration with Intel. The partnership aims to develop next-generation memory technology for AI applications, with a target market launch around 2029. Furthermore, reports circulated in late January regarding discussions for another substantial investment into OpenAI.

Investor attention now turns to SoftBank's own quarterly results, scheduled for release on February 11. Until then, developments at Arm and within the wider AI sector are likely to continue influencing the company's share price.