Arm Stock Rallies on AI Optimism But Faces Smartphone Setbacks

By creating the blueprints that support chips rather than selling actual chips, Arm Holdings has subtly emerged as one of the most significant businesses in the world of computing. From high-end smartphones to power-efficient servers running in data centers, its architecture powers billions of devices. But the focus these days is on the stock price, which is erratic and clearly stretched.

Despite a recent earnings report that would normally inspire confidence, ARM shares have fallen closer to $122 after skyrocketing to a high of $183.16 in late 2025. Last quarter, revenue increased by almost 26% year over year, driven by a 27% increase in royalties. The growing use of Arm’s most recent v9 architecture and computation subsystems, particularly by Android OEMs, was largely responsible for that boost.

Arm’s strength is found in the constancy of its business model rather than in a single product line. With more than 368 active license partners, the company’s value is spread throughout a wide range of sectors, including cloud computing, consumer electronics, and the automobile industry. These license contracts provide steady income and are especially helpful when hardware cycles could otherwise impede expansion.

Arm has increased its Total Access licenses to 50 and its Flexible Access licenses to 318 through strategic growth. These numbers represent more than simply contract milestones; they also show growing relationships with OEMs and chip designers. Arm successfully integrates itself into its partners’ R&D roadmaps by providing access to complete IP portfolios, generating a steady stream of revenue.

But there is still risk. Particularly in the smartphone industry, memory limitations have begun to bite, and Arm recognized that unit shipments could drop by as much as 20%. It’s interesting to note that even in the worst situation, that drop might only take away 2% to 4% of its smartphone royalties, indicating that diversification has greatly decreased the company’s exposure.

By embracing the datacenter opportunity, Arm is getting ready for a change that might shape the company’s future ten years. It anticipates that, as AI usage increases, this market will surpass all others in terms of income. As processes increasingly use CPUs rather than conventional GPUs, its chip designs are now essential to inference and training jobs. With these advancements, Arm is positioned to play a significant role in compute environments of the future, where power economy is just as important as raw performance.

Therefore, the stock is being held back by valuation. Even when compared to semiconductor darlings like Nvidia or AMD, ARM trades at a premium, with a PEG ratio of 3.6 and over 70x forward earnings. Future expansion may make the premium fair, but for the time being, margins are being squeezed. Last quarter, R&D costs increased 46% year over year, while adjusted operating margins decreased to 40.7%.

Reading those margin numbers made me pause; I was intrigued by the ambition but wary of the expense.

Only a 7.3% growth in adjusted earnings per share is anticipated for the current fiscal year. It might be challenging for investors to price that contrast—a business making significant investments while profits growth is slow. Although it may take longer to mature, it is a growth story.

There are certain significant benefits to Arm’s distinctive asset-light structure. It produces gross margins of over 94% without the need to maintain inventory or operate factories. Even in times of economic strain, its royalty model guarantees steady income with few additional expenses, resulting in a very effective financial profile.

The business has projected fourth-quarter revenue of $1.47 billion, an 18% rise from the previous year. Royalties are predicted to grow in the low teens, while licensing is predicted to expand in the high teens. These numbers show that the company is still growing, albeit more slowly than the post-IPO fervor may have indicated.

Early-stage investors saw Arm as a wager on architecture as a service, a business model that appeared to be very adaptable in an industry that was digitizing quickly. Now, the business is retooling its approach as the competition heats up and customer needs get more intricate. It is making investments in advanced AI-optimized modules, chiplets, and full system-on-chip (SoC) products.

Arm is indicating a change from being a passive enabler of computing innovation to an active orchestrator of it by expanding its presence in the datacenter market and embracing chip-level customization. That change is daring and has the potential to be revolutionary.

However, the stock seems to be in a holding pattern for the time being. With modest trade volumes and cautiously positive attitude, it is trading close to its 50-day average. Although many analysts point out that the current price already accounts for a large portion of the near-term upside, analysts have set a consensus target of $160.

Market observers have been debating whether Arm’s high multiples are sustainable in recent days. Some contend that a rerating is feasible if the datacenter approach quickens and margins level out. Others argue that caution is warranted due to the decreasing smartphone market and rising spending.

Arm has maintained a very clear message throughout this entire situation. From edge devices to AI inference, it aspires to be at the forefront of next-generation computing. Rene Haas has been a very practical leader, striking a balance between expansion and prudent financial management.

The stock might still surprise to the upside if the business can keep up with the rising expectations associated with its value. However, even without fireworks, Arm is a key component of many portfolios due to its capacity to collect royalties across a vast tech ecosystem.