Sometimes you do everything right and the market still hands you a shrug. That's roughly the story for Arm Holdings Plc (ARM) on Thursday, with the stock down nearly 5% in premarket trading despite a quarterly report that, by most measures, was a clean beat.

The backdrop wasn't helping. Nasdaq futures declined 0.56%, while S&P 500 futures gained 0.14%. Investors are pulling back from semiconductor and artificial intelligence names, and Arm got caught in the current.

On Wednesday, the company reported better-than-expected second-quarter fiscal 2027 results, driven by strong licensing demand and growing adoption of its technology in AI data centers.

Adjusted earnings rose 33% year over year to 52 cents per share, beating Wall Street's estimate of 47 cents. Revenue increased 27% to $1.443 billion, topping analysts' estimate of $1.376 billion. That marks the company's fifth consecutive quarter of revenue growth exceeding 20%.

Licensing Revenue Jumps 50%

License and other revenue surged 50% year over year to $773 million, reflecting strong demand for Arm's intellectual property and contributions from major licensing agreements.

Royalty revenue rose 8% to $670 million, supported by higher royalty rates and growing data center adoption. However, memory pricing pressures in the smartphone market partly offset growth. Data center royalty revenue doubled year over year.

Annualized contract value increased 12% to $1.79 billion.

Adjusted gross margin reached 97.9%, compared with 98.2% a year earlier. Adjusted operating margin expanded to 44.2% from 41.1%. Adjusted operating income climbed 37% to $638 million, while adjusted operating expenses rose 19% to $774 million.

GAAP net income fell 45% to $130 million, or 12 cents per share.

Operating cash flow totaled $207 million, while adjusted free cash flow reached $110 million. Cash and short-term investments stood at $3.621 billion.

AI Chip Demand Strengthens Growth Outlook

Arm said demand for its AGI CPU continues to accelerate, with purchase orders from multiple customers extending through calendar 2027.

The company expects its first commercial deliveries in the fiscal fourth quarter and sees meaningful revenue contributions beginning in fiscal 2028.

Arm expressed greater confidence in generating up to $2 billion in AGI CPU revenue across fiscal 2027 and 2028. It also expects its share of Arm-based server deployments at major hyperscalers to exceed 60% by the end of calendar 2026.

Arm Issues Third-Quarter Forecast

Arm expects third-quarter adjusted earnings of 52 cents to 60 cents per share, compared with analysts' estimate of 56 cents.

The company forecast revenue of $1.49 billion to $1.59 billion, compared with Wall Street's estimate of $1.528 billion. The revenue forecast midpoint of $1.54 billion stands slightly above consensus.

Arm also expects adjusted operating expenses of approximately $825 million.

Chip Stocks Face Sharp Post-Election Rotation

Beyond its earnings and outlook, Arm faces broader pressure as investors reassess AI-related stocks following the U.S. midterm elections. The shift in market sentiment has weighed on semiconductor companies despite continued demand for AI infrastructure.

Bloomberg reported Thursday that Asian markets experienced an unusually sharp rotation from semiconductor stocks toward consumer and Chinese equities.

Results from Arm and Qualcomm Inc. (QCOM) added to concerns about supply constraints and future growth.

Analysts Split On Tech Selloff

Tech bull Dan Ives warned that semiconductor stocks could fall another 10% to 12% during the technology correction.

However, Fundstrat's Tom Lee called the AI selloff an "overreaction." He sees potential for a 20% technology rally if hedge funds return before year-end.

ARM Stock Price Activity: ARM Holdings shares were down 4.52% at $183.12 during premarket trading on Thursday, according to market data.