Arm Earnings: Data Centers Becoming Increasingly Important for the Growth Story

ForkLibertarian · 2026-02-12T14:29:23+00:00

Arm Holdings reported disappointing ARM licensing revenue of $505 million but anticipates growth to exceed $750 million next quarter. With a projected 20% revenue growth through 2028, data center royalties may outpace smartphone revenue. The $80 fair value estimate suggests shares are 20% overvalued, with upcoming fiscal 2027 guidance critical for stock performance.

ForkLibertarian

2026-02-12 14:29:23

Abstract generation in progress

Key Morningstar Metrics for Arm Holdings

Fair Value Estimate: $80.00
Morningstar Rating: ★★
Morningstar Economic Moat Rating: Wide
Morningstar Uncertainty Rating: High

What We Thought of Arm Holdings’ Earnings

Investors were disappointed by Arm Holdings’ ARM licensing revenue of $505 million in the third fiscal quarter, which came below consensus estimates. However, licensing revenue will accelerate next quarter and could go beyond $750 million.

Why it matters: There’s many moving parts in Arm’s results, but with one fiscal quarter left, the overall 2026 outlook points to more than 20% revenue growth, a growth rate we also expect in 2027 and 2028.

Data-center-related royalty revenue grew over 100% year on year, thanks to a triple growth engine of TAM expansion, market share gains, and higher royalty rates. We model a continuation of this trend with a 50% revenue compound annual growth rate in this segment until 2030. We expect data center-related royalty revenue will surpass smartphones by the end of the decade.
In smartphones, royalty rate increases are the main growth driver, given Arm already enjoys 99% market share here. The smartphone market is likely to contract in 2026 and 2027 as higher memory prices will ultimately result in more expensive devices for end-consumers, reducing units. Management claims this could have a 1%-2% negative effect on fiscal 2027 royalty revenue, but the final effect remains to be seen.

The bottom line: We maintain our $80 fair value estimate, which represents a 35 times adjusted forward P/E multiple (for the year ending March 2027). Arm’s share price has come to a more reasonable range in the last three months after a 40% decline, but we still see shares as 20% overvalued.

Coming up: Guidance for fiscal 2027 seems to be the next milestone for the stock. We don’t expect meaningful deviations from a 20% revenue growth rate for fiscal 2027, even with potential smartphone market headwinds. But given there’s high expectations baked into the share price, a small guidance miss could be a net negative. Still, strong growth in the cloud market and higher royalty rates from the v9 architecture and compute subsystems could well offset any smartphone headwinds.

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