ARM: AI Licensing Royalties And Physical AI Expansion Will Drive Durable Upside

The updated analyst price target for Arm Holdings edges down by about $1.60, reflecting analysts' attempts to balance higher assumed revenue growth and margins with mixed views on the company's transition efforts and the market's willingness to support a premium P/E multiple.

Analyst Commentary

Recent Street research on Arm paints a mixed picture, with bullish analysts focused on earnings strength and AI exposure, and more cautious voices highlighting execution and valuation risk around the business model transition.

Bullish Takeaways

Several bullish analysts highlight a solid recent earnings report, pointing to strength in licensing and royalty revenues as support for the current valuation framework.
Some see Arm gaining design win traction across multiple end markets, which they view as an important signal for future revenue visibility and platform relevance.
One major firm points to AI momentum from edge to cloud and a growing number of AI related projects, which they see as a reason to justify higher operating spend and support a premium P/E.
Another bullish view is that robust licensing activity and DC/AI royalties that are up 2x year over year could underpin higher medium term revenue assumptions in analysts’ models.

Bearish Takeaways

More cautious analysts flag Arm’s exploration of moving further into the fabless semiconductor business as a meaningful execution risk that could pressure returns if the transition is not managed well.
Some bearish analysts see the possibility that investors may penalize Arm’s multiple during this transition period, especially if the market questions the durability of premium earnings assumptions.
The increase in operating expenses tied to AI related initiatives is also a concern for some, who worry that higher spend may weigh on margins if associated revenue does not track expectations.
Overall, the cautious camp frames the current setup as one where strong recent results sit alongside higher uncertainty around business mix, capital intensity, and the level of P/E the market is willing to support.

What's in the News

Arm created a new Physical AI division focused on robotics, as part of a broader company reorganization highlighted at CES. The move signals a push to supply chips and designs for humanoid and other physical robots (Reuters).
South Korea's antitrust regulator, the Korea Fair Trade Commission, inspected Arm's Seoul offices as part of an inquiry into its licensing practices, following a complaint from Qualcomm that alleges Arm is restricting access to its technology and affecting competition (Bloomberg).
SoftBank reportedly explored a potential takeover of Marvell and considered combining Marvell with Arm. Discussions did not result in an agreement on terms, according to people familiar with the matter (Bloomberg).
OpenAI is reported to be working with Arm on a CPU designed to pair with an AI chip OpenAI is developing with Broadcom, with TSMC expected to manufacture the chip. The collaboration points to Arm's role in AI oriented compute projects (The Information).

Valuation Changes

Fair Value: edged down slightly from US$164.85 to about US$163.25 per share.
Discount Rate: moved up marginally from 11.25% to about 11.28%, implying a slightly higher required return in the model.
Revenue Growth: adjusted up a bit from 22.13% to roughly 22.17% in the forward assumptions.
Net Profit Margin: nudged higher from about 30.79% to around 30.93% in updated estimates.
Future P/E: trimmed modestly from about 99.24x to roughly 97.84x, reflecting a slightly lower assumed premium multiple.

Custom silicon adoption and rising royalty rates are driving substantial royalty and earnings growth, while premium IP boosts per-chip monetization.
Broadening AI, IoT, and edge market reach, plus a large developer ecosystem, ensures recurring revenue, earnings stability, and sustainable margin expansion.
Moving into new compute segments and dependence on flagship smartphones heighten execution risks, market exposure, and pressures on margins amid rising R&D costs and competitive threats.

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?

Arm's accelerating penetration in AI data centers-driven by hyperscalers shifting to custom silicon featuring Arm Neoverse CPUs-positions the company to capture significant royalty revenue growth, especially as their market share soars from ~18% to nearly 50% in a year.
A surge in demand for connected devices and intelligent edge computing (IoT, automotive, wearables) continues to expand Arm's addressable market. New CSS and v9 platform rollouts with higher royalty rates underpin long-term royalty and top-line revenue growth as AI and edge adoption broadens.
Ongoing premiumization of Arm's IP-evidenced by rising royalty rates from v8 (~2.5%–3%), to v9 (~5%), to CSS (now exceeding 10%)-is increasing per-chip monetization, setting up strong net margin and earnings gains as customers adopt next-generation solutions.
Arm's robust developer and partner ecosystem (22 million+ developers, endorsements from players like Apple, Samsung, NVIDIA, and AWS) forms a sticky, software-enabled platform that drives recurring licensing/royalty streams and enhances forward visibility for revenue and earnings stability.
Expanding investment in R&D to accelerate new product categories (compute subsystems, chiplets, full-end solutions, AI-specific IP like Ethos and Zena) positions Arm to further diversify its revenue streams and outpace secular industry demand for power-efficient, scalable compute, supporting sustainable earnings and margin expansion.

Arm Holdings Earnings and Revenue Growth

Arm Holdings Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

Analysts are assuming Arm Holdings's revenue will grow by 21.5% annually over the next 3 years.
Analysts assume that profit margins will increase from 17.0% today to 30.6% in 3 years time.
Analysts expect earnings to reach $2.3 billion (and earnings per share of $2.12) by about September 2028, up from $699.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.5 billion in earnings, and the most bearish expecting $1.6 billion.
In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 99.0x 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?

The company's long-term plan to move "beyond the current platform into additional compute to subsystems, chiplets and potentially full-end solutions" introduces significant execution risk and complexity, particularly in segments like ASICs where others are struggling; such missteps could increase R&D costs, dilute focus, and negatively impact operating margins and net earnings.
Heavy reliance on "flagship smartphones" for accelerated royalty growth exposes Arm to risk from a potentially saturated smartphone market and any slowdown in premium device demand, which could limit revenue expansion and compress margins if diversification efforts in other verticals underperform.
The company is accelerating R&D investment to support new products and higher royalty rates, but this uptick in operating expenses-if not matched by proportional profitable revenue growth-may constrain future earnings and pressure margins.
Potential geopolitical challenges persist in China, which now constitutes over 21% of quarterly revenue; any escalation in U.S.-China tech trade tensions or changes in export controls could limit Arm's access to this large market and reduce future sales volumes.
Growing vertical integration and in-house silicon development by hyperscalers and major customers (e.g., Google, Amazon, Apple) might shrink the external licensing TAM and erode Arm's customer base, impacting recurring royalty streams and long-term revenue visibility.

Valuation

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

The analysts have a consensus price target of $152.591 for Arm Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. 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 analyst's consensus, you'd need to believe that by 2028, revenues will be $7.4 billion, earnings will come to $2.3 billion, and it would be trading on a PE ratio of 99.0x, assuming you use a discount rate of 10.7%.
Given the current share price of $140.8, the analyst price target of $152.59 is 7.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
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.

Have other thoughts on Arm Holdings?

Create your own narrative on this stock, and estimate its Fair Value using our Valuator tool.

Create Narrative

How well do narratives help inform your perspective?

Disclaimer

AnalystConsensusTarget 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 AnalystConsensusTarget 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 AnalystConsensusTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.