Executive Summary / Key Takeaways

• Arm Holdings is strategically positioned at the heart of the AI revolution, leveraging its energy-efficient compute platform and pervasive software ecosystem to drive growth across data center, mobile, automotive, and IoT markets.
• The company's shift towards higher-value Compute Subsystems (CSS) and the Armv9 architecture is significantly increasing royalty rates per chip, outpacing unit shipment growth in key segments like smartphones.
• Arm is rapidly gaining market share in the data center, with its Neoverse chips expected to power nearly 50% of new hyperscaler server chips this year, challenging x86 dominance through superior power efficiency and customization.
• Aggressive R&D investments in next-generation technologies like Zena CSS for automotive and advanced chiplet solutions are foundational to its long-term growth, though these investments may impact near-term profitability.
• Despite strong growth momentum and a robust pipeline, the absence of full-year fiscal 2026 guidance due to macro and tariff uncertainties warrants careful investor consideration.

The Foundation of Future Compute

Arm Holdings plc, founded in 1990 and headquartered in Cambridge, United Kingdom, stands as a foundational architect in the semiconductor industry. The company's core business revolves around designing and licensing central processing unit (CPU) products and related technologies to a vast ecosystem of semiconductor companies and original equipment manufacturers. This asset-light model generates revenue primarily through licensing agreements for its intellectual property (IP) and royalties on every chip shipped incorporating its designs. With over 300 billion Arm chips shipped historically, the company's technology underpins a significant portion of the world's digital infrastructure.

Arm's overarching strategy is to be the ubiquitous compute platform for the burgeoning AI era, extending from the smallest edge devices to the most powerful cloud data centers. This ambition is rooted in its differentiated technology, which prioritizes energy efficiency and scalability. The company is actively transitioning from being solely an IP component supplier to a platform-first company, a strategic evolution reflected in its new product naming strategy, which includes Neoverse for infrastructure, Niva for PCs, Lumex for mobile, Zena for automotive, and Orbis for IoT and edge AI.

The industry landscape is currently defined by the "insatiable compute demands of AI," driving unprecedented requirements for both performance and energy efficiency. Major technology giants are committing colossal investments in AI infrastructure, with Meta (META) projecting nearly $100 billion in 2026 capital expenditures, Google (GOOGL) raising its 2025 outlook to $85 billion, and Microsoft (MSFT)'s annual spending trending above $100 billion. This massive spending, described by analysts as a "watershed moment," signals years of rapid AI growth ahead. The escalating energy consumption of data centers, projected to triple by the end of the decade and potentially account for 25% of global energy usage, underscores the critical importance of Arm's power-efficient designs.

Technological Edge and Innovation Driving Growth

Arm's core technological differentiation lies in its CPU architecture, renowned for its superior power efficiency and scalability compared to alternatives like the x86 architecture. This efficiency is not merely a feature but a critical advantage in the AI era. For instance, NVIDIA (NVDA)'s Grace Blackwell, which integrates Arm CPUs, is 25 times more energy-efficient than previous x86-based systems. Similarly, Google's Axion Armv9 chips offer up to 65% better price performance than current-generation x86 solutions. Arm Neoverse in data centers demonstrates 50% to 60% better power efficiency compared to x86, a compelling proposition for hyperscalers grappling with escalating operational costs and energy demands.

The Arm architecture also allows for a high degree of customization at the chip, blade, and even rack levels. This flexibility is crucial for maximizing performance and optimizing the total cost of ownership (TCO) for diverse AI workloads. Furthermore, Arm's unmatched software developer ecosystem, comprising over 22 million developers (more than 80% of the global base), creates a powerful flywheel effect. More developers translate to greater software availability, which in turn drives increased demand for Arm's compute platform across every market. Initiatives like Kleidi AI, Arm's core AI software layer with over eight billion cumulative installs, and GitHub Copilot integration, further solidify this ecosystem advantage.

Arm's R&D initiatives are strategically focused on extending these advantages. The company's Compute Subsystems (CSS) represent a significant innovation, offering pre-integrated and optimized compute blocks that accelerate time-to-market and reduce design complexity for customers. Demand for CSS has "exceeded expectations", with the first generation delivering double the royalty of Armv9. New CSS deals are commanding royalty rates "north of 10%" of the average selling price (ASP), surpassing previous expectations. These rates are also designed to increase year-on-year with new solution offerings.

The Armv9 architecture, the company's latest CPU design, is driving higher royalty rates and enabling more advanced AI applications. While Armv9 roughly doubled Armv8 royalty rates, subsequent generations of v9 implementations are also seeing increased royalty rates. In the automotive sector, the recently launched Zena CSS is optimized for AI-driven workloads like autonomous driving (L2 to L4 ADAS applications), addressing the need for accelerated time-to-market for automotive customers. For edge AI, the Ethos-U85 NPU is designed for extremely low-power applications, with a roadmap to expand its performance capabilities. These technological advancements are critical for Arm's competitive moat, enabling higher ASPs, better margins, and expanded market positioning, particularly in the rapidly evolving AI landscape.

Competitive Landscape and Strategic Positioning

Arm operates within a highly competitive semiconductor IP and CPU design market, facing direct competition from x86 architecture giants like Intel Corporation (INTC) and Advanced Micro Devices (AMD), as well as GPU and AI accelerator leader NVIDIA Corporation, and mobile chipset specialist Qualcomm Incorporated (QCOM).

Arm's competitive advantages are deeply rooted in its energy-efficient architecture and pervasive ecosystem. In the data center, Arm Neoverse is rapidly gaining ground against x86, with over 70,000 enterprises now running AI workloads on Arm Neoverse chips, a 40% increase year-on-year and a 14x surge since 2021. The company expects its market share of Neoverse-based chips at top hyperscalers to reach "nearly 50% this year", a significant leap from an estimated sub-20% a year prior. This growth is fueled by both general-purpose workloads (e.g., AWS (AMZN) Graviton, Google Axion, Microsoft Cobalt) and the shift in AI workloads from x86-connected NVIDIA Hopper to Arm-integrated Grace Blackwell designs. The ability to standardize on a single software stack across a single CPU architecture further simplifies data center management and enhances Arm's value proposition.

In the mobile segment, Arm maintains a dominant position. Its royalty revenue from smartphones grew 40% year-on-year in Q2 fiscal 2025, significantly outpacing the modest 4% unit growth in the market. This outperformance is a direct result of the increasing adoption of Armv9 and CSS in flagship smartphones, driving higher value per device. The company is also making strategic inroads into the PC market, aiming for a 50% market share long-term by expanding its lineup of Windows on Arm products. The automotive sector is another strong growth area, with double-digit growth and increasing adoption of CSS for IVI and ADAS applications.

Despite these strengths, Arm faces vulnerabilities. Its high valuation, reflected in a TTM P/E ratio of 212.89 and a P/S ratio of 36.14, suggests significant future growth is already priced in. The company's aggressive R&D investments, while crucial for long-term success, are leading to increased operating expenses and may impact profit margins in the near term. Indirect impacts from tariffs on end demand also present a degree of uncertainty. The ongoing litigation with Qualcomm, while financially accounted for in Arm's forecasts, highlights the complexities of managing its extensive licensing agreements.

Financial Performance and Strategic Investment

Arm concluded fiscal year 2025 with robust financial results, achieving record total revenue of over $4 billion and royalty revenue exceeding $2 billion for the first time. The fourth quarter of fiscal 2025 marked a significant milestone, with total revenue surpassing $1 billion for the first time in the company's history, reaching $1.24 billion, a 34% year-on-year increase. This momentum carried into the first quarter of fiscal 2026, where total revenue was $1.05 billion, marking the second consecutive quarter above $1 billion and the best Q1 ever.

Royalty revenue continues to be a primary growth driver. In Q1 fiscal 2026, royalty revenue reached a record $585 million, up 25% year-on-year, demonstrating strong momentum across all end markets. Smartphone royalties, in particular, grew "an order of magnitude faster than the market" in Q1 fiscal 2026, driven by the uptake of Armv9 and CSS in flagship devices. Licensing revenue in Q1 fiscal 2026 was $468 million, a 1% decrease year-on-year, which was anticipated following a very strong Q1 fiscal 2025. However, the Annualized Contract Value (ACV) in Q1 fiscal 2026 surged 28% year-on-year, significantly exceeding the company's long-term expectation of mid-to-high single-digit license growth. This strong ACV growth was partly attributed to new licensing deals, including three additional CSS licenses for data center and PC applications.
Profitability metrics reflect Arm's high-margin business model, with a TTM Gross Profit Margin of 94.71% and a TTM Net Profit Margin of 16.96%. Non-GAAP operating profit in Q4 fiscal 2025 was a record $655 million, with non-GAAP EPS of $0.55. In Q1 fiscal 2026, non-GAAP operating profit was $412 million, and non-GAAP EPS was $0.35.

The company is aggressively investing in R&D, with non-GAAP operating expenses reaching $619 million in Q1 fiscal 2026, and projected to be approximately $655 million in Q2 fiscal 2026. This accelerated investment is crucial for developing next-generation technologies and capitalizing on the AI opportunity.

Arm's balance sheet remains robust, characterized by a TTM Current Ratio of 4.99 and a low TTM Debt/Equity Ratio of 0.06, indicating strong liquidity and financial flexibility.

Outlook and Forward-Looking Strategy

Arm's guidance for Q2 fiscal 2026 projects revenue between $1.01 billion and $1.11 billion, representing approximately 25% year-on-year growth at the midpoint. Both royalties and licensing are expected to be flat sequentially. Non-GAAP operating expenses are anticipated to be around $655 million, with non-GAAP EPS in the range of $0.29 to $0.37. The company has expressed "high confidence in healthy growth in the coming year and in years to come", driven by visibility into customer design pipelines, contracted royalty rates, and surging demand for custom silicon and AI.

Management expects royalty growth to be "pretty close to where we were from the previous quarter" for the remainder of the year, with sequential growth of 10% to 15% in the latter half of fiscal 2026. The adoption of Armv9 is projected to reach 60% to 70% of total royalties, significantly higher than the current 25%. The majority of mobile phones are expected to be Armv9-based within a year, demonstrating a clear roadmap for royalty expansion. While the company did not issue full-year fiscal 2026 guidance due to "lower visibility than is traditional" and "uncertainty in the global trade and economic picture", it continues to invest aggressively in R&D to "ensure AI runs on Arm".

Strategic initiatives include exploring additional subsystems, chiplets, and potentially full-end solutions, driven by customer demand for accelerated development of complex SoCs. Partnerships with SoftBank (SFTBY) and OpenAI on projects like Stargate for AI infrastructure and Cristal Intelligence for enterprise AI agents underscore Arm's central role in shaping the future of AI. The expansion of CSS offerings, including Zena CSS for automotive, and the continued growth in data center market share, are key pillars of Arm's long-term growth trajectory.

Conclusion

Arm Holdings is uniquely positioned to capitalize on the transformative power of artificial intelligence, serving as the foundational compute platform from the cloud to the edge. Its relentless focus on energy efficiency, coupled with a robust and expanding software ecosystem, provides a compelling competitive advantage against rivals. The strategic shift towards higher-value Armv9 architecture and Compute Subsystems is demonstrably translating into accelerated royalty growth, significantly outpacing market unit shipments.

While the company's aggressive R&D investments and the broader macro uncertainties may introduce some near-term volatility, Arm's deep visibility into customer design pipelines and contracted royalty rates underpin a strong long-term growth outlook. The rapid market share gains in the data center, coupled with continued dominance in mobile and emerging opportunities in automotive and PC, solidify Arm's indispensable role in the future of computing. Investors should recognize Arm's technological leadership and strategic foresight as critical drivers for sustained value creation in the evolving AI landscape.