Key Takeaways
- Arm shares fell about 13% on November 5 even though revenue rose 27% to a record $1.44 billion and adjusted EPS beat estimates.
- Licensing jumped 50% while royalties rose only 8%, because memory pricing hurt smartphone shipments.
- Bank of America warned that relying on SoftBank for licensing revenue “could pose circular financing concerns,” though revenue from related parties held flat.
- Arm’s fiscal third-quarter report in early February should show whether phone royalties have bottomed before AGI CPU deliveries begin.
Arm Holdings (ARM) posted its fifth straight quarter of revenue growth above 20%. Shares still fell about 13% on November 5, because royalties grew only 8%.
The culprit is memory, as suppliers steer production toward AI servers and phone makers build fewer devices. That hurts Qualcomm (QCOM), whose handset chips brought in $27.8 billion of its $38.4 billion chip revenue in fiscal 2025. Arm’s own data center chip, meanwhile, delivered about twice the performance per rack of the EPYC 9755 from Advanced Micro Devices (AMD) in testing Arm cites.
Revenue rose 27% to $1.44 billion, a record for the September quarter. Adjusted EPS of $0.52 also beat the $0.47 LSEG consensus.
So the quarter was strong. The market simply cared more about the slowest line in it.
Licensing carried the quarter
Licensing carried the quarter
Arm’s two revenue streams moved at very different speeds:
- License and other revenue rose 50% to $773 million.
- Royalty revenue rose 8% to $670 million.
- Data center royalties doubled, while physical AI royalties grew 50%.
Higher royalty rates per chip helped, but memory pricing in smartphones offset part of that gain. Partners also shipped more than 10 billion Arm-based chips in a single quarter for the first time.
Zoom out, and the top line has rarely looked better…
Quarterly revenue climbed to $1,443 million from $1,135 million a year earlier. However, licensing made up 53.6% of it, up from 45.4%, and large license deals land unevenly.
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Servers are doing the real work
Arm’s bull case now runs through the data center. Its share of servers at the top hyperscalers jumped from 15% in 2024 to more than 50% in 2025. Arm expects that figure to top 60% by the end of 2026, helped by Amazon’s Graviton, Microsoft’s Cobalt and Google’s Axion.
Then there’s the AGI CPU, the first chip Arm sells directly to customers. Purchase orders from multiple customers now run through calendar 2027. Oracle Cloud also plans to offer AGI CPU instances next year.
That demand gave management more confidence in reaching up to $2 billion of AGI CPU revenue across fiscal 2027 and 2028. Building silicon costs money, though.
How much more is Arm spending to get there?
R&D expense rose 24% to $857 million. Share-based compensation climbed to $376 million from $265 million, and quarterly free cash flow fell to $110 million from $411 million.
SoftBank and phones cloud the outlook
Bank of America analyst Vivek Arya noted that licensing tends to lead royalties by 12 to 24 months. Yet he also warned, in a note reported by CNBC, that “Arm’s increasing dependence on SoftBank for Licensing revenue could pose circular financing concerns.”
The filing eases that worry somewhat. Revenue from related parties, which include SoftBank, was flat at $424 million. External customer revenue, by contrast, jumped 43% to $1.02 billion.
GAAP profit also looks worse than it is. Net income fell to $130 million from $238 million, but last year included a $131 million gain on a business sale. Non-GAAP operating margin widened to 44.2% from 41.1%.
Guidance was solid. Arm expects December-quarter revenue of $1.54 billion, plus or minus $50 million, or roughly 24% growth. Adjusted EPS should land near $0.56, although royalties are set to grow only low single digits.
Even after the drop, the stock carries a rich premium:
Arm still trades at a sales multiple far above both Qualcomm and AMD.
My take: The selloff treats a memory squeeze as a lasting royalty problem. Doubling data center royalties and 43% external revenue growth tell me the engine is healthy. Still, near-flat royalty growth is hard to defend at this premium, so I would buy in small pieces.
The fiscal third-quarter report, expected in early February, will show whether phone royalties have bottomed. First AGI CPU deliveries, due by the end of March, will then test that $2 billion target.
So what is Arm stock actually worth?
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Disclaimer:
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