ARM: AI Licensing And Royalty Momentum Will Drive Future Upside Potential

Analysts have raised their fair value estimate for Arm Holdings to $215 from $210, citing higher modeled revenue growth, stronger profit margins, and a lower future P/E multiple as they incorporate recent bullish research and more positive views on licensing, royalties, and AI-related demand.

Analyst Commentary

Recent Street research on Arm Holdings has tilted more positive, with several bullish analysts citing solid execution on licensing and royalties, as well as growing AI related exposure, as reasons for revisiting their valuation work.

One group of bullish analysts raised their price targets into a US$180 to US$190 range after the latest earnings report, pointing to what they described as solid results and traction for Arm's designs across multiple end markets. These higher targets generally reflect confidence in Arm's ability to translate design wins into revenue and to sustain its licensing and royalty model.

JPMorgan highlighted solid fiscal Q2 results, tied to stronger licensing and royalty revenues, and linked that to what it sees as AI momentum and higher value capture for Arm. Another firm referenced robust licensing activity and data center and AI related royalties that were twice the prior year level, and used that backdrop to support a higher target and an outlook for stronger future revenue growth.

At the same time, not all commentary has been purely upbeat. Raymond James assumed coverage with a Market Perform stance and no price target, pointing out that Arm's exploration of a move into the fabless semiconductor business could increase profit potential but also introduces execution risk. The firm also noted that the market may assign a lower multiple during any transition period.

Overall, the tone across recent reports has leaned constructive, as analysts who are bullish on the stock incorporate stronger licensing and royalty trends, as well as AI related projects from edge to cloud, into their models and valuation frameworks.

Bullish Takeaways

Several bullish analysts have lifted their price targets into the US$180 to US$190 range, suggesting they see room for upside versus prior expectations as they factor in recent earnings and revised assumptions on growth and profitability.
Positive commentary around solid fiscal Q2 results, underpinned by stronger licensing and royalty revenues, feeds into a view that Arm is executing well on its core business model, which supports higher fair value estimates.
AI is a recurring theme, with bullish analysts pointing to momentum across edge and cloud projects and higher value capture from these workloads as a key medium term growth driver that they are now more fully reflecting in their numbers.
One firm cited robust licensing activity and data center and AI related royalties that were up 2x year over year, and used that performance to justify higher forward revenue growth assumptions and a higher target price.

What's in the News

Nvidia is reported to be targeting a 2026 launch for Windows on Arm notebooks, pointing to another large chip designer planning PCs around Arm based platforms (DigiTimes).
Arm has reorganized to create a "Physical AI" division focused on robotics, aiming to expand its presence in that market as companies showcase humanoid robots at CES (Reuters).
South Korea's antitrust regulator inspected Arm's Seoul offices as part of an inquiry into its licensing practices, following a complaint from Qualcomm that focuses on access to Arm technology (Bloomberg).
SoftBank is reported to have weighed a potential takeover of Marvell earlier in the year and considered a combination with Arm, although the parties did not reach agreement on terms (Bloomberg).
Arm issued earnings guidance for its third quarter of 2026, indicating expected revenue of US$1.225b, plus or minus US$50m.

Valuation Changes

The fair value estimate has increased slightly from US$210 to US$215 per share.
The discount rate has risen from 10.69% to 11.26%, indicating a higher required return in the updated model.
The revenue growth assumption has moved higher, from 27.73% to 30.98%.
The net profit margin assumption has increased from 32.38% to 43.56%.
The future P/E multiple has been reduced from 110.91x to 74.19x, reflecting a lower valuation multiple applied to projected earnings.

Explosive revenue and margin growth expected due to accelerating data center adoption, higher royalty rates, and advancement in customizable chip solutions.
Dominance in edge AI, vast software ecosystem, and expansion into subsystems position Arm for durable, compounding high-margin earnings across multiple industries.
Rising competition from alternative architectures, customer self-sufficiency, geopolitical risks, and industry trends toward open standards threaten Arm's revenue, market share, and profitability.

Catalysts

About Arm Holdings

Arm Holdings plc architects, develops, and licenses central processing unit products and related technologies for semiconductor companies and original equipment manufacturers.What are the underlying business or industry changes driving this perspective?

Analysts broadly agree that Arm's share in the hyperscaler data center market will approach 50%, but this significantly understates the potential; with the rapid displacement of x86, increasing customization benefits, and increasing demand for AI workloads, Arm's market share in data center CPUs could exceed 75% over the next several years-driving explosive royalty and licensing revenue growth.
The analyst consensus highlights higher royalty rates from v9 and CSS adoption, but this is likely still conservative; new CSS generations have already broken through anticipated royalty rate ceilings, with next-gen deals pricing above 10% of ASP, which will lead to an accelerating uplift in net margins as each successive product cycle matures.
Arm's leadership in edge AI and ultra-low-power compute, with products like Ethos NPU and new microarchitectures for wearables, IoT, and automotive, positions it as the default standard across billions of devices-a trend that will create a compounding effect for royalty revenues and install-based software monetization in these fast-growing segments.
The company's expansion into subsystem, chiplet, and potentially end-to-end ASIC solutions will allow Arm to capture a larger portion of the semiconductor value chain per device, driving both higher per-unit revenues and deepening relationships with ecosystem partners across new industries, including automotive and custom computing.
Arm's colossal software ecosystem-with over 22 million developers and the majority of the global embedded software base-creates a powerful competitive moat, increasing customer lock-in, enabling new recurring revenue streams through tools and services, and further ensuring multi-decade, high-margin earnings durability.

Arm Holdings Earnings and Revenue Growth

Arm Holdings Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

This narrative explores a more optimistic perspective on Arm Holdings compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
The bullish analysts are assuming Arm Holdings's revenue will grow by 27.7% annually over the next 3 years.
The bullish analysts assume that profit margins will increase from 17.0% today to 32.4% in 3 years time.
The bullish analysts expect earnings to reach $2.8 billion (and earnings per share of $2.65) by about September 2028, up from $699.0 million today. The analysts are largely in agreement about this estimate.
In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 110.9x on those 2028 earnings, down from 213.3x today. This future PE is greater than the current PE for the US Semiconductor industry at 33.5x.
Analysts expect the number of shares outstanding to grow by 0.76% per year for the next 3 years.
To value all of this in today's terms, we will use a discount rate of 10.69%, as per the Simply Wall St company report.

Arm Holdings Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?

Accelerating adoption of alternative architectures such as RISC-V-particularly by large customers like Qualcomm and Alibaba-poses a risk to Arm's traditional licensing model, potentially leading to structurally slower license revenue growth and placing long-term pressure on core recurring royalties.
Growing vertical integration by major customers and hyperscale providers, with industry leaders like Apple, Google, and Amazon designing more of their own silicon, threatens Arm's ability to defend and expand its share, making total revenue increasingly dependent on a narrower customer base and amplifying concentration risk in future earnings.
Geopolitical fragmentation and protectionism, especially around critical chip design and export controls in regions like China and the US, present the risk that Arm could be excluded from strategic markets or face unpredictable headwinds, directly curbing its addressable market and limiting associated royalty and license revenue.
Accelerating R&D investment to keep up with changing workloads-such as AI, ML, and data center advancements-is increasing operating expenses at a faster pace, compressing net margins and potentially risking declines in free cash flow if top-line monetization does not keep pace with these elevated costs.
The industry's push for open-source ISAs and government incentives for localized chip architectures under policies like the CHIPS Act and EU Chips Act encourages local alternatives and open standards, which could reduce Arm's bargaining power and pricing leverage, putting continued pressure on both royalty rates and overall top-line revenue growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

The assumed bullish price target for Arm Holdings is $210.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Arm Holdings's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $210.0, and the most bearish reporting a price target of just $80.0.
In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $8.6 billion, earnings will come to $2.8 billion, and it would be trading on a PE ratio of 110.9x, assuming you use a discount rate of 10.7%.
Given the current share price of $140.8, the bullish analyst price target of $210.0 is 33.0% higher.
We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.

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Disclaimer

AnalystHighTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystHighTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystHighTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.