Arm Carves Lucrative Niche in Crowded CPU Resurgence

Arm Holdings (ARM) shares experienced a dip in after-hours trading Wednesday, even as the chip designer delivered a stronger-than-anticipated fiscal fourth quarter and projected an optimistic outlook, particularly for its data center CPU business. The company reported fiscal 2026 fourth-quarter revenue, ending March 31, surged 20% year-over-year to $1.49 billion, surpassing the LSEG-compiled consensus estimate of $1.47 billion. Non-GAAP earnings per share (EPS) also climbed 9% to 60 cents, exceeding the expected 58 cents.

Despite the robust financial performance, Arm’s stock saw a roughly 6% decline in after-hours trading, retracting approximately half of the gains achieved during the regular session. This pullback, while perhaps surprising to some, was a potential scenario flagged for members of the CNBC Investing Club. The stock had closed at a record high of $237, marking an impressive 117% year-to-date gain prior to the earnings release. The market’s reaction underscores the dynamic interplay between strong fundamentals and the impact of significant prior run-ups on stock valuations.

The core of Arm’s strategic importance now lies in its pivotal role within the burgeoning data center CPU market. Over the past six months, the artificial intelligence revolution has undergone a significant evolution. Initially, the focus was squarely on the superior capabilities of Graphics Processing Units (GPUs) for training large language models. Subsequently, the spotlight shifted to inference workloads. Now, these AI tasks are evolving further, moving from handling human-generated prompts to supporting continuous, agent-driven operations. While GPUs will undoubtedly remain critical, Central Processing Units (CPUs), once considered a legacy component, are experiencing a remarkable resurgence.

This CPU renaissance was further validated by Intel’s recent earnings report. Intel CEO Pat Gelsinger remarked on their April 23 earnings call that the CPU-to-GPU ratio in AI racks has shifted dramatically. Previously, it was approximately 1-to-8, but with the rise of agentics, it’s now closer to 1-to-4, with projections suggesting a potential 1-to-1 parity in the future. This trend signifies a substantial increase in the demand for CPUs compared to just a few years ago.

Advanced Micro Devices (AMD) echoed this sentiment during its earnings call Tuesday evening. AMD CEO Lisa Su quantified the expanding CPU market, stating her expectation that the total addressable market for CPU servers will grow at a compound annual growth rate exceeding 35%, potentially reaching over $120 billion by 2030. In a recent interview, Su emphasized that “Agents are really driving tremendous demand in the overall AI adoption cycle.” Given the rapid ascent of Arm’s stock, it’s understandable that some profit-taking might occur after such significant gains on the same set of positive developments.

However, the post-earnings call commentary from Arm solidified the bullish thesis. Arm-based CPUs command a dominant market share, exceeding 50% among the top hyperscalers. While competitors like AMD and Intel may tout their market share, Arm highlighted on the call that the three largest AI accelerator providers strategically pair their accelerators with Arm-based CPUs. Specifically, Nvidia’s Hopper GPUs are integrated with Arm-based CPUs, Google’s Tensor Processing Units (TPUs) are paired with its own Arm-based Axion CPUs, and Amazon’s Trainium chips are designed to work with Arm-based Graviton processors. This ecosystem integration underscores Arm’s indispensable position.

“Whether it’s Nvidia, whether it’s Amazon, whether it’s Google, the very largest and most prevalent accelerators by volume are the TPU, it’s Trainium, and it’s Rubin. … Those all connect to Arm,” CEO Renee Haas explained during the call. Notably, the TPUs from Alphabet’s Google are co-designed with Broadcom, a significant player in the semiconductor industry.

Why We Own Arm

Arm Holdings stands at the epicenter of this CPU revival, benefiting directly from the shift in AI workloads from training to inference, which has reignited demand for central processing units. The company’s established business model, based on lucrative licensing agreements and royalty payments tied to its widely adopted chip architecture by major hyperscalers, provides a strong foundation. Furthermore, Arm is actively innovating with its first in-house data center CPU, specifically engineered for agentic AI workloads. This strategic move, unveiled at its “Arm Everywhere” event in March 2026, represents a significant expansion of its product portfolio.

The response to Arm’s in-house CPU development has been exceptionally positive. At its unveiling, the company projected over $1 billion in demand within the next two years. In less than two months, management has doubled this projection, now anticipating over $2 billion in customer demand across fiscal years 2027 and 2028. While this upbeat outlook was slightly tempered by a note on maintaining the initial $1 billion guidance due to the need for supply chain alignment, the underlying demand signals are exceptionally strong. Concerns regarding these supply chain constraints appear to be a primary driver for the after-hours stock pullback.

Arm’s compelling value proposition for hyperscalers lies in its ability to potentially reduce AI data center capital expenditures (capex) by up to $10 billion per gigawatt. This is a critical factor in the current market environment, with a strong emphasis on free cash flow generation. The longer-term target for these cost savings is projected at $15 billion by fiscal year-end 2031. Importantly, these new chip offerings are not expected to cannibalize Arm’s existing licensing and royalty business, effectively addressing a key bear thesis.

“The primary reason we did this,” Haas stated regarding the development of its own chip, “was that our customers asked for it. At the end of the day, we are responding to customer demand in a market.” This customer-centric approach is a testament to Arm’s deep understanding of market needs.

In essence, the demand for Arm-based data center CPUs is unprecedented, providing a robust foundation for sustained double-digit revenue growth. The success of its in-house chip development adds a significant growth vector to the company’s narrative. The key challenge and opportunity for management now lie in navigating the complex and constrained supply chain environment to meet and exceed these ambitious goals.

The CNBC Investing Club maintains its price target of $250 and a hold-equivalent rating of 2, acknowledging the recent parabolic surge in the stock price. Since its initiation in the portfolio, Arm shares have appreciated nearly 40% as of Wednesday’s close. While some of this advance may be given back, the rally in Arm shares, both from its April 20 initiation and throughout 2026, has been nothing short of remarkable.

Quarterly Performance and Outlook

Regarding the quarterly results, License and Other revenue experienced a substantial increase of approximately 29% year-over-year, reaching $819 million, thereby exceeding Street estimates. These revenue streams are derived from the upfront license fees Arm collects from customers seeking access to its advanced CPU architecture and designs.

Royalty revenue grew 11% year-over-year to $671 million. While this figure fell slightly short of Street expectations, the shortfall can likely be attributed to the ongoing weakness in the smartphone market, exacerbated by memory shortages. Nevertheless, this segment still demonstrated year-over-year growth.

More significantly, the company witnessed an accelerated ramp-up of Arm-based server chips by all major hyperscalers, alongside increased deployment of its data center networking chips. The robust performance of Arm’s gross margins and operating margins also exceeded expectations. Arm’s current revenue streams, predominantly from licenses and royalties, contribute to exceptionally strong gross margins, which stood at 98.32% on a non-GAAP basis during the quarter. (GAAP, or Generally Accepted Accounting Principles, provides a standardized framework for financial reporting, while Non-GAAP, or adjusted figures, aim to offer a clearer, apples-to-apples comparison by excluding one-time or unusual items.)

Non-GAAP operating margins also showed a positive trend, with expectations for further operational leverage as cost growth is projected to decelerate from a 26% compound annual growth rate (CAGR) in fiscal years 2024 through 2026 to a mid-teens CAGR from fiscal year 2026 through fiscal year 2031.

Guidance for the Upcoming Quarter

Arm typically provides quarterly guidance. For the first quarter of fiscal year 2027, the company forecasts revenue in the range of $1.255 billion to $1.265 billion, with a midpoint of $1.26 billion, plus or minus $50 million. This figure is slightly ahead of the consensus estimate of $1.25 billion compiled by LSEG. It’s important to note that this represents a sequential decrease from the $1.49 billion reported in fiscal Q4.

Non-GAAP operating expenses are projected to be $760 million, which is somewhat higher than the FactSet consensus estimate of $742 million. Non-GAAP earnings per share are expected to be between 36 cents and 44 cents, with a midpoint of 40 cents, plus or minus 4 cents. This outlook surpasses the LSEG consensus estimate of 36 cents.