Key Takeaways
- Arm’s royalties grew 8% in its fiscal second quarter as memory costs hit smartphone makers, and the company expects low-single-digit royalty growth in the December quarter.
- CEO Rene Haas said data center royalties doubled and should keep growing at triple-digit rates for years, helped by Arm-based CPUs from NVIDIA and the big cloud companies.
- Haas said Arm’s share of servers at the top hyperscalers more than tripled to over 50% in 2025, though phones are still Arm’s largest royalty pool at about 43% of fiscal 2026 royalty revenue.
- Arm’s forward P/E was already below its three-year average before the post-earnings slide, which looks reasonable for a company with a second growth engine this strong.
Arm Holdings (ARM) has a phone problem:
Its royalties grew just 8% in the September quarter, below the roughly 13% management had guided for, as memory prices squeezed smartphone makers. And Arm expects royalty growth to slow to the low single digits in the December quarter.
But on Arm’s fiscal second-quarter call, CEO Rene Haas pointed to the part of the business that’s growing fast. Data center royalties doubled year over year, and a big part of that growth runs through NVIDIA (NVDA).
Haas said Arm has “a high degree of confidence on data center royalties growing triple digits over the next number of years.”
That’s a second growth engine, and a fast one.
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Arm went from 15% to more than half
Haas backed the call with share numbers. Arm’s share of servers at the top hyperscalers more than tripled, from 15% in calendar 2024 to more than 50% in calendar 2025, he said. He expects it to top 60% by the end of this year as Amazon’s Graviton, Google’s Axion, Microsoft’s Cobalt and NVIDIA’s platforms ramp.
He also pointed to a shift inside AI servers. The CPU that connects to the accelerators (the “head node”) is moving from x86 chips to Arm. NVIDIA’s Vera Rubin platform uses its Arm-based Vera CPU, and Google has announced that it’s moving the CPU connected to its eighth-generation TPU from x86 to Axion.
That turns NVIDIA’s AI build-out into an Arm royalty stream. Arm says Vera is now in production with OpenAI, and Oracle’s cloud already offers Vera CPUs. NVIDIA reports later this month, and I’ll be watching what it says about how fast Vera is ramping.
Phones are still the bigger pool
The stall still matters, because phones are Arm’s largest royalty business. Smartphone application processors produced about 43% of royalty revenue in fiscal 2026 (the year to March 2026), Arm’s annual report says. Cloud and networking were only about 10% of royalties at the end of fiscal 2025, CFO Jason Child said at the time.
But data center royalties have more than doubled year over year in every quarter since. If Haas is right about triple-digit growth, a slice that size catches up to phones within a few years.
Plus: Arm now has its own chip. When it launched the Arm AGI CPU in March, it talked about $1 billion of demand visibility. Haas said that has roughly doubled, to about $2 billion of revenue across fiscal 2027 and 2028, with purchase orders from multiple customers running through calendar 2027 and first deliveries on track for the March 2027 quarter.
Analysts already expect a lot
Going into the report, analysts expected Arm’s revenue to climb from $4.92 billion in fiscal 2026 to $8.27 billion in fiscal 2028 (the year ending March 2028):
Some of that jump is the new chip. And with Arm guiding December-quarter revenue to $1.54 billion, about the $1.53 billion analysts expected, I don’t see anything in this report that should pull those estimates down.
The valuation has come down, too. Even before the post-earnings slide, Arm traded at 82x forward earnings. That’s a little under its three-year average of 85x and far below the 202x it hit in June:
At today’s price, it’s lower still. It’s still a rich multiple, though, and a phone slump that drags on would leave less room for error.
The data center is the story
The way I see it, the market is pricing Arm on its weakest business right now. With data center royalties and a brand-new chip business both growing fast, and the multiple below its own three-year average, this looks like a buying opportunity to me.
Of course, memory prices could keep squeezing phones longer than expected. Arm reports again in early February, when management has promised a firm forecast for its chip sales in fiscal 2028.
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