It’s been a rollercoaster ride for Arm Holdings (NASDAQ: ARM) shares this year. The stock has more than doubled in 2026, although it is off nearly 50% from its spring highs. More recently, the company got a lift on solid fiscal first-quarter earnings and upbeat commentary about its data center central processing unit (CPU) opportunity.
Despite the company’s CPU opportunity, I wouldn’t be chasing the stock. Let’s dig into the U.K.-based company’s recent results and prospects to see why I feel this way.
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CPU opportunity in focus
Arm shocked investors earlier this year when it announced that it would make its own physical chips for the first time ever, given the huge opportunity it sees in server CPUs. The company has long been a leading provider of intellectual property (IP) to the semiconductor industry, but it’s never developed its own chips.
That changed when it introduced its Arm Artificial General Intelligence (AGI) CPU in March. At the time, the company projected that the data center CPU market would grow to $100 billion by 2031 and that it would be able to capture a 15% market share. Nvidia and Advanced Micro Devices, meanwhile, have more recently projected that the server CPU market would climb to $220 billion.
Arm also targeted $1 billion in server CPU revenue between fiscal 2027 and fiscal 2028. On its earnings conference call, management said it was now more confident that it would achieve over $1 billion in server CPU revenue in fiscal 2028, as its backlog has grown to over $2 billion and it has seen improved supply chain conditions. The company also said that it had secured the manufacturing capacity to help meet demand.
Arm’s core business, meanwhile, remained solid in fiscal Q1. Revenue increased 22% to $1.29 billion, while annualized contract value (ACV), which smooths out license revenue, rose 13%. License revenue climbed by 23% year over year to $574 million, fueled by demand for its next-generation architecture. Softbank contributed $193 million in revenue.
Royalty revenue increased by 22% year over year to $715 million. Arm said data center royalty revenue once again doubled and that it was seeing sustained momentum. Growth was being led by hyperscalers ramping up production of Arm-based server chips, while it was also seeing strength in data processing units (DPUs) and SmartNICs. Smartphone and other device revenue grew despite overall market weakness, due to higher royalty rates coming from its newer Armv9 architecture.
Looking ahead, Arm forecasts fiscal second-quarter revenue to come in around $1.38 billion, representing year-over-year growth of 22%. License revenue is projected to grow about 30%, while royalty revenue is expected to rise in the low teens. It guided for adjusted earnings per share to be between $0.43 and $0.51.
Is the stock a buy?
Arm is looking to have its cake and eat it too in the server CPU market. The company already supplies the IP behind custom data center CPUs, like Nvidia’s Vera, Amazon‘s Graviton, and Alphabet‘s Axion chips.
Meanwhile, it’s now offering its own server CPUs, looking to capture more share in this fast-growing market. With the rise of AI agents expected to shrink the GPU-to-CPU ratio from 8:1 for training to 1:1 for agentic AI, the data center CPU market is expected to grow rapidly in the coming years. However, Arm is now essentially competing with its own customers, which does create an interesting dynamic.
One of the biggest issues for Arm in this new endeavor is being able to get components and foundry capacity, but it looks like it has done a good job on this front. However, it does still have a headwind in its largest end market, smartphones. Smartphones and other device sales are expected to be pressured due to elevated memory costs leading to higher prices, cutting consumer demand.
With the stock trading at a forward price-to-earnings (P/E) ratio of over 100 based on the fiscal 2027 consensus estimates, this AI stock is too rich for my blood given the risks involved. The move to creating physical chips could also eventually lead to multiple compression in the stock, given that it is no longer a pure IP company.
Should you buy stock in Arm Holdings right now?
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Geoffrey Seiler has positions in Advanced Micro Devices, Alphabet, and Amazon. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Arm Holdings, and Nvidia. The Motley Fool has a disclosure policy.
Is Arm Holdings Stock a Buy on the Bullish CPU Outlook? was originally published by The Motley Fool
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