Arm AI Ambitions Grow, But Analysts Warn Of Margin Trouble Ahead

Arm Holdings (NASDAQ:ARM) underwhelmed with its latest quarterly results, prompting Wall Street analysts to revise their ratings on the chip designer.

The company reported fiscal first-quarter revenue of $1.053 billion, up 12% year-over-year. It missed analyst estimates of $1.055 billion.

Arm reported first-quarter adjusted earnings of 35 cents per share, which is in line with analyst estimates.

Also Read: Chipmaker Arm Is Riding AI Wave And Outperforming The Market

Arm expects second-quarter revenue of $1.01 billion to $1.11 billion, compared to estimates of $1.056 billion. The company anticipates second-quarter adjusted earnings of 29 cents to 37 cents per share, compared to estimates of 35 cents per share.

Analyst Reaction

Needham analyst Charles Shi reiterated a Hold rating for ARM.
Rosenblatt analyst Kevin Cassidy maintained a Buy rating and a $180 price forecast for ARM.
Goldman Sachs analyst James Schneider reiterated ARM with a Neutral rating and reduced the price forecast from $160 to $150.
JPMorgan analyst Harlan Sur maintained a rating of Overweight for ARM and increased the price forecast from $150 to $175.

Needham: Shi sees Arm’s first-quarter results and second-quarter guidance as primarily in line with expectations. While full-year revenue expectations remain unchanged, guidance now suggests a weaker third quarter and stronger fourth quarter. Licensing revenue, Shi says, offsets softer royalties due to weak smartphone trends.

Arm is transitioning from a pure IP licensing model to a product-centric approach, likely involving chiplet or full-chip development. This shift, driven partly by expanded design services revenue from SoftBank, pushes operating expenses higher—raising fiscal 2026 OpEx by around $100 million. Shi believes this transformation could pressure earnings soon, even as it signals a bold strategic pivot with long-term implications.

Rosenblatt: Cassidy views Arm’s first-quarter fiscal 2026 results as roughly in line with expectations, though earnings guidance came in slightly below consensus due to increased R&D spending, primarily to support its growing relationship with SoftBank. Cassidy remains optimistic that this investment will yield a positive return, particularly in AI data center applications.

He highlights the strong momentum of Arm’s Compute Subsystem (CSS), which helps customers bring AI-enabled products to market faster and supports higher royalty rates. First-quarter revenue of $1.053 billion, driven by a 25% year-over-year rise in royalties, slightly exceeded forecasts. While license revenue dipped 1%, this was expected due to timing shifts. Cassidy forecasted continued growth from AI, hyperscaler deployments, and Arm’s expanding product partnerships.

Goldman Sachs: Schneider sees Arm’s latest quarterly results as primarily in line with expectations, but believes the stock may face near-term pressure. While revenue and EPS matched Street estimates, royalty revenue came in below forecast, and management’s updated guidance pointed to slower royalty growth and elevated operating expenses.

Schneider notes that expectations were high going into the report, driven by optimism around AI deployments and smartphone recovery. However, lower visibility in smartphone demand and deferral of royalty recognition have tempered the outlook.

Arm is well-positioned for long-term gains in data centers and benefits from increasing royalty rates. Still, Schneider remains Neutral on the stock. He cut his EPS estimates by 6% and lowered his price forecast, citing limited near-term upside and high valuation.

JPMorgan: Arm’s fiscal first-quarter 2026 results as in line with expectations. Substantial licensing revenue helped offset weaker royalties tied to soft smartphone demand. For the September quarter, Arm guided revenue of $1.06 billion—matching consensus—but EPS guidance of 33 cents missed expectations due to higher operating expenses.

While full-year revenue expectations remain unchanged, management now expects royalty growth to come in at the low end of its prior 10–15% range. Sur remains impressed by Arm’s success with its Compute Subsystem (CSS) architecture, which generates royalty rates above 10%, but expresses concern over the company’s push into full chip development. He warns this could erode margins and potentially alienate key customers.

Price Action: ARM stock is down by 13.8% at $140.78 at the last check on Thursday.

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