ARM Earnings Meet Guidance But Narrative Is Shifting and Questions Loom

Key Morningstar Metrics for Arm

• Fair Value Estimate: $80
• Morningstar Rating: ★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Arm’s Earnings

Arm’s ARM first-quarter results met guidance, with $1.06 billion in revenue and $0.35 in non-GAAP earnings per share. Next-quarter guidance of $0.33 non-GAAP EPS was below consensus, which sent the shares down 7% in aftermarket trading.

Why it matters: Royalty revenue surged 25% year on year, while licensing revenue was flat, bringing total revenue growth to 12.1%. We forecast total fiscal 2026 revenue of $4.74 billion, an 18% year-over-year increase.

• Next-quarter EPS guidance was weaker than expected due to higher operating expenses as Arm continues to invest in next-generation technology: namely, compute subsystems, new evolutions of v9, and, potentially, full-chip designs (more on this below).

The bottom line: We are maintaining our $80 fair value estimate and see the shares as highly overvalued. At $150 per share, wide-moat Arm trades at 80 times and 150 times our fiscal 2026 forecast for non-GAAP EPS and GAAP EPS, respectively. We struggle to find a comfortable risk-reward profile for investors.

Between the lines: We believe the narrative around Arm has shifted, from being very strong to being mixed.

• Arm continues to gain traction in CSS, which carries royalty rates of 10% or higher, compared with roughly 5% for v9 and 2.5% for v8. Arm now holds a total of 16 CSS licenses across 10 customers, with three additions this quarter. CSS is a pre-engineered collection of core components, or subsystems, that helps clients accelerate time-to-market and reduce their engineering burden.
• But some of Arm’s largest customers, such as Nvidia, Apple, or Qualcomm, are shifting away from Arm’s off-the-shelf licenses. Instead, they are designing custom cores based on Arm’s architecture, for which they pay lower royalty rates. Nvidia’s next-generation datacenter CPU, Vera, which will pair with Rubin GPU (2026), shifts from an off-the-shelf design to a custom Nvidia one. Firms designing custom Arm cores pay fewer royalties per chip.