ARM Risks Mount As AI-Driven Royalties May Not Justify Premium Multiple

We raise our fair value estimate for Arm Holdings to approximately $99 per share from about $86, reflecting analysts' higher price targets driven by solid earnings beats, accelerating licensing and AI related royalty growth, and improved long term revenue and multiple assumptions, despite a modestly higher discount rate and slightly lower profit margin outlook.

Analyst Commentary

Recent Street research on Arm reflects a generally constructive outlook on earnings power and artificial intelligence related optionality, but it also highlights areas of caution that could pressure the stock's premium valuation if execution falters.

Several firms have raised price targets into the $180 to $190 range while reiterating positive ratings, citing solid quarterly beats, accelerating licensing demand, and growing AI driven royalties across data center and edge workloads. These updates point to confidence that Arm can sustain elevated revenue growth into fiscal 2026 and beyond, supported by increasing design win traction across multiple end markets.

At the same time, JPMorgan and other bullish voices emphasize that higher operating expenses tied to a larger pipeline of AI projects are a deliberate investment to deepen Arm's value capture in the ecosystem, from edge devices to cloud infrastructure. That spending, while pressuring near term margins, is viewed as necessary to defend and extend the franchise as AI workloads proliferate.

Bearish Takeaways

• Bearish analysts highlight that Arm's multiple already discounts a long runway of AI driven growth, leaving limited margin for error if licensing momentum or royalty uplift moderates from current levels.
• The move to explore a broader fabless semiconductor strategy is seen as a potential source of incremental profits, but also introduces execution risk and capital intensity that could warrant a valuation de rating during the transition period.
• Some cautious views stress that rising operating expenses, even when AI related, may compress profitability if revenue growth normalizes, challenging the sustainability of current premium multiples.
• There is concern that any slowdown in design win traction across key end markets, or delays in converting wins into high margin royalties, could expose downside to consensus growth assumptions embedded in the share price.

What's in the News

• South Korea's antitrust regulator inspected Arm's Seoul offices as part of an inquiry into its licensing practices, following a Qualcomm complaint that Arm is restricting access to its technology (Bloomberg).
• SoftBank explored a potential takeover of Marvell with an eye to combining it with Arm, but talks did not progress due to a lack of agreement on terms (Bloomberg).
• OpenAI is working with Arm to develop a CPU that will pair with the AI chip OpenAI is building with Broadcom, with TSMC slated to manufacture the chip (The Information).
• SoftBank is negotiating a $5 billion margin loan backed by Arm shares to fund additional investment in OpenAI, which would raise its total Arm backed margin loans to about $18.5 billion (Bloomberg).
• Qualcomm has adopted Arm's latest computing architecture in its chips to boost AI performance and sharpen competition against MediaTek and Apple (Reuters).

Valuation Changes

• The fair value estimate has risen moderately to approximately $99 per share from about $86, reflecting a more optimistic long term outlook.
• The discount rate has increased slightly to around 11.1 percent from about 10.7 percent, modestly raising the required return assumption.
• Revenue growth has been lifted slightly to roughly 17.4 percent from about 16.3 percent, indicating a small upgrade to long term top line expectations.
• The net profit margin has fallen meaningfully to about 23.7 percent from roughly 27.0 percent, incorporating higher anticipated operating expenses over time.
• The future P/E has expanded significantly to approximately 87.0x from about 72.3x, implying a richer multiple on higher expected growth despite lower margin assumptions.