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U.K.-based  Apple ( AAPL ) supplier ARM Holdings ( ARMH ) stock toppled Wednesday, as its earnings disappointed despite Q4 sales topping Wall Street expectations, amid a strategic shift into the Internet of Things and cloud markets. ARM stock fell 8.8% Wednesday, to 37.74, and touched its lowest point since July 2013. Shares under-performed IBD’s 41-company Electronic Semiconductor-Fabless industry group, which fell a fraction after touching a 16-month low this week. ARM isn’t pretending the smartphone market hasn’t stalled, Rene Haas, the company’s executive vice president and chief commercial officer, told IBD. But ARM still has headroom for growth, he said. “It’s nothing we haven’t been expecting nor planning for,” he said. “But about half our revenue comes from outside smartphones.” For Q4, ARM reported $407.9 million in sales and 8.2 pence (12 cents) earnings per share ex items. Both measures were up 14% year over year, ARM said. The consensus of 11 analysts polled by Thomson Reuters modeled $398.1 million and 38 cents (26.2 pence). The designer of mobile chips saw sales rise 15% for the year, to $1.49 billion. EPS rose 25% to 30.2 pence (44 cents). Fourth-quarter licensing sales fell 2% to $1.58 million, but royalty sales rose 31% to $216.7 million. Software/tool sales rose 19%. However, smartphone-chip sales fell 3%. ARM guided to 2016 sales “broadly in line with market expectations” at roughly 9.7% year-over-year growth to $1.63 billion in sales, William Blair analyst Anil Doradla wrote in a research report. Doradla reiterated his outperform rating on ARM stock, but Canaccord Genuity analyst Matthew Ramsay cut his price target to 55 from 60, citing continued macroeconomic semiconductor uncertainty. He maintained his buy rating on ARM stock. ARM Finagles Stalled Mobile Industry Roughly 45% of ARM’s sales stem from smartphones, down from 60% in 2010. The smartphone slowdown won’t slug ARM nearly as hard as its rivals, Haas told IBD. During Q4, ARM shipped 4 billion chips. Half of the smartphone chips shipped contained ARM’s 64-bit processor, which commands higher royalty fees than ARM’s older, 32-bit processor. About 40% of smartphone chips shipped contained ARM’s graphics processing unit (GPU), Mali, and 10% held eight or more cores. “What that means is that even as growth slows from a unit standpoint, we still have good room to grow because underneath the hood we have three strong factors that drive growth in the market,” Haas said, referring to processors, GPUs and cores. ‘Cars Are Just Getting Smarter’ In 2016, ARM expects to grow further into the cloud and Internet of Things markets, Haas said. Licensing in both segments could be a boon. Networking market share grew to 15% in 2015 vs. 10% in 2014, and ARM now counts Broadcom ( AVGO ) and Marvell Technology Group ( MRVL ) among its networking chip clients. Advanced Micro Devices ( AMD ), Nvidia ( NVDA ) and Qualcomm ( QCOM ) also use ARM-based server chips, according to ARM. “That (5% jump in networking) is a pretty big jump, given what’s going on in that marketplace and given that those markets have some stickiness once you’re inside,” Haas said. In the Internet of Things market, Haas expects ARM to benefit from burgeoning automotive intelligence. Most “embedded technologies” — thermostats, motors, drones and vehicles — use older technology. But the 8-bit micro-controllers powering those technologies are rapidly being replaced by the 32-bit architecture, Haas says. “The fact is cars are just getting smarter,” he said. “There are cars today that could have 100-plus chips inside them. A smartphone might only have one or two chips using ARM technology.”