Arm Holdings (ARM +3.30%) has reported an impressive earnings performance in the second quarter of fiscal 2026 (ended Sept. 30, 2025), with revenue and earnings exceeding consensus estimates.
Revenue soared 34% year over year to $1.14 billion. While royalty revenue jumped 21% year over year to $620 million, licensing revenue surged 56% year over year to $515 million. The company's adjusted net income also increased by 32% year over year to $417 million.
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The demand driven by artificial intelligence (AI) has powered Arm's financial growth, but the company's share price remains volatile. The stock surged nearly 50% after a strong earnings report in February 2024. But it lost momentum and fell almost 9% in pre-market trading on May 8, following weaker-than-expected fiscal 2026 guidance and concerns about the impact of rising tariffs.
And despite a solid earnings performance in this most recent quarter, the stock seems to be faltering due to increasing macroeconomic uncertainties, triggered by a dramatic surge in corporate layoffs last month.
Strong demand trends
As hyperscalers and large enterprises race to add computing capacity, power capacity and infrastructure are emerging as key constraints. Arm stands to benefit from this trend, thanks to its focus on designing chip architectures that deliver higher performance while consuming less power.
NASDAQ: ARM
Key Data Points
Subsequently, the company's Neoverse computing platform has become the foundation for custom data center CPUs, including Nvidia's Grace, Amazon's AWS Graviton, Alphabet's Google Axion, and Microsoft's Cobalt chip. Over 1 billion CPUs based on the Neoverse platform are already deployed. Arm's data center Neoverse royalties increased more than 100% year over year in the second quarter.
Smartphone royalties also grew much faster than the overall market, driven by demand for Armv9 and Compute Subsystem (CSS) chip architectures. The company has positioned CSS as a starting point for customers developing next-generation custom chips, with a focus on faster time-to-market. The company also launched its most advanced mobile compute platform, Lumex CSS, in the second quarter and is already seeing royalty revenue from a client.
Licensing activity was also strong, with annualized contract value growing 28% year over year in the second quarter.
A hidden clue
Despite healthy revenue streams from royalty and licensing, investors remain cautious due to limited visibility into Arm's future strategy. During the second-quarter earnings call, the company highlighted its heavy research and development (R&D) spending on engineering talent and for developing next-generation architectures, computing subsystems, and complete system-on-chip (SOC) designs. These R&D investments primarily drove up adjusted operating expenses by 31% year over year to $648 million in the second quarter.
However, Arm has not given much information about the timeline for these new products or technologies. The company said that it will share more details only when it achieves three milestones:
- Tape-out (the final step in design when a chip is sent to a fabricator)
- Sampling (selecting representative tasks to test a chip design)
- Noncancellable customers.
Although management's stance highlights its focus on execution, the lack of information is making it difficult for Wall Street to value the stock properly with any confidence. The financial modeling becomes even more difficult for Arm, since licensing revenue is lumpy with deal volume and value fluctuating from quarter to quarter.
Growth catalysts
Still, despite these uncertainties, Arm's long-term growth story is intact for several reasons.
First, its CPUs are widely used by hyperscalers and AI model developers to orchestrate AI accelerators and handle workloads that require improved price-performance.
Second, the company is also seeing increasing demand for its CPUs and Lumex CSS platform as AI inference workloads (real-time deployment of AI models) start transitioning from cloud to local devices such as smartphones, automobiles, and PCs. The company is also working with Meta Platforms to develop portable software for running AI models efficiently in the cloud or on local devices.
Third, Arm's presence in Stargate -- an initiative along with OpenAI, Oracle, and SoftBank Group to invest $500 billion in data center capacity over the next few years -- can prove to be a long-term revenue driver.
Valuation
Shares currently trade at a very rich valuation of over 65 times forward earnings. That number stems from confidence in its royalty revenue, driven mainly by increasing adoption of Arm-based chips in cloud, edge, and mobile markets.
However, the high valuation also leaves significantly less margin for error. Any slowdown in AI infrastructure spending, lengthened deal cycles, or execution missteps can hurt the company's share price.
Hence, considering its strong fundamentals and risks, investors can opt for a dollar-cost averaging strategy to benefit from the upside potential in this volatile stock while controlling downside risk.
