Arm’s pivot to a direct chipmaker is paying off with demand for its first data center CPU doubling in just six weeks, but supply chain constraints are forcing the company to temper its own blockbuster forecast.
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Arm stock falls 7% as supply chain fears mute 2x chip demand
Arm Holdings PLC (NASDAQ:ARM) saw its stock fall roughly 7 percent in after-hours trading despite reporting fourth-quarter results that beat analyst estimates and revealing soaring demand for its new data center processor. The negative reaction shows how a strategic pivot into making its own chips brings new supply chain risks that are giving investors pause, even as the company’s core business remains strong.
"As AI becomes more agentic, demand for Arm AGI CPU, Arm’s first data center chip, has exceeded expectations, reinforcing Arm as the compute platform for the AI era," Arm CEO Rene Haas said.
For the quarter ended March 31, Arm reported adjusted earnings of 60 cents per share on revenue of $1.49 billion. The results surpassed LSEG consensus estimates calling for 58 cents in earnings per share on $1.47 billion in revenue. For its first quarter of fiscal 2027, the company guided for revenue of $1.26 billion and adjusted earnings of 40 cents per share, both slightly ahead of analyst forecasts.
The results highlight a company at a major inflection point. While Arm's traditional licensing business is healthy, its future is now tied to its ability to directly produce and sell its own silicon, a move that pits it against some of its largest customers but also opens up a much larger market. The stock, which had already gained 117 percent year-to-date, now faces the challenge of executing on this new and complex strategy.
Data Center Growth Masks Smartphone Slowdown
Arm’s fourth-quarter revenue growth was driven by its licensing segment, which grew 29 percent year-over-year to $819 million. Royalty revenue, however, increased a more modest 11 percent to $671 million, a slowdown from previous quarters. Management attributed the slower royalty growth to weakness in the smartphone market and a tough comparison from the prior year.
The real engine of growth is the data center. Royalty revenue from the data center segment more than doubled for the second consecutive year, driven by the adoption of its Neoverse architecture by major cloud providers. Amazon's Graviton, Google's Axion, and Nvidia's Vera CPUs are all built on Arm's architecture, giving the company more than 50 percent market share among top hyperscalers. Management expects data center royalties to double again in fiscal 2027.
From IP Licensor to Chip Maker: A New Business Model
The most significant news from the earnings call was the update on Arm's first in-house chip, the Arm AGI CPU. In the six weeks since its unveiling, customer demand for the chip has doubled from an initial $1 billion to over $2 billion for fiscal years 2027 and 2028. This demand comes from both existing partners like Meta and new customers who want Arm-based computing without designing their own chips.
Despite the surging demand, management kept its formal guidance at the initial $1 billion, citing the need to secure capacity for wafers, memory, and advanced packaging from partners like TSMC. This supply constraint is the primary reason for the stock's negative after-hours reaction. The move transforms Arm from the "Switzerland of semiconductors"—a neutral IP provider—to a direct competitor with its own customers like Amazon, Google, and Nvidia. Haas noted that all partners were informed in advance and support the move, believing it will expand the overall software ecosystem for Arm-based chips.
Analysts See High Bar for Further Stock Gains
Even with the pullback, Arm's stock price of around $219 in late trading is well above the average analyst price target of $180. The stock's massive rally in 2026 has already priced in a significant amount of success for its new strategy. As noted by Jim Cramer's CNBC Investing Club, which holds the stock, it's difficult for a stock to rally three times on the same information, making a pullback unsurprising.
The company's long-term goal is to reach $25 billion in total revenue by fiscal 2031, with $15 billion coming from chips and $10 billion from its traditional IP business. The key variable is how quickly Arm can resolve its supply chain bottlenecks. Its ability to secure advanced manufacturing capacity will determine whether the $2 billion in demand can be converted into revenue, and whether its ambitious transformation from a blueprint designer to a house builder will ultimately succeed.
This article is for informational purposes only and does not constitute investment advice.
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