Arm’s Biggest Opportunity Comes With Its Biggest Risk

On July 29, Arm (ARM) delivered a record quarter. The firm beat Wall Street consensus on both key metrics. Revenue of $1.29 billion was up 22% from a year ago, and the non-GAAP earnings of $0.45 per share also rose 29%. Free cash flow also saw exceptional growth, jumping 343% from a year ago to $665 million. Even so, the stock price, which was already down by more than $100 in the past month, continued to decline after the earnings release. The reason was primarily how high the stock is priced. Arm currently trades at more than 200 times forward earnings. At that level, even a solid quarter often isn’t enough to push ARM stock higher. Pointing to a soft smartphone market and high memory costs, the management also reduced the full-year royalty growth outlook to the high teens.

While that got most of the attention, the company quietly offset much of the weakness by more than doubling data center royalties from a year earlier. Management pushed back too, calling the smartphone slump cyclical, guiding to a recovery next year. It also maintained its target of more than 20% royalty growth by fiscal 2029. Demand for Arm’s new AGI CPU, its first in-house server chip, has already surpassed $2 billion, double management’s own initial estimate. As I covered previously, that chip puts Arm in direct competition with the same customers who license its architecture, from Amazon (AMZN) and Alphabet (GOOG) (GOOGL) to Nvidia (NVDA). That tension is now what has the FTC examining Arm, after it opened an antitrust probe in May. Regulators are looking at whether Arm might degrade or deny blueprint licenses to the very customers its chips now compete with. The record numbers are real, but so is the risk sitting underneath them.