^{Photo: Euronews.com}

Arm Stock Falls on Earnings Miss and Sluggish Smartphone Royalties

Shares of chip architecture giant Arm Holdings fell as much as 9% in after-hours trading Wednesday, following the release of its first-quarter earnings report, which showed revenue slightly below analyst expectations and a sharp drop in net income.

• Earnings per share (adjusted): 35 cents vs. 35 cents expected
• Revenue: $1.05 billion vs. $1.06 billion expected
• Net income: $130 million (down 42% year-over-year)

While EPS came in line with estimates, the shortfall in revenue and underperformance in the company's core smartphone royalty business raised red flags among investors.

Smartphone Royalties Disappoint as Market Slows

Arm’s Chief Financial Officer Jason Child acknowledged that royalties tied to smartphone chip designs—historically the company’s largest revenue stream—fell short of expectations.

“The growth wasn’t quite as strong in the smartphone sector as maybe we’d expected,” said Child.

The company attributed part of this slowdown to macroeconomic conditions and less visibility into end-user demand, especially in a volatile trade environment where tariffs and export restrictions can quickly shift consumer behavior.

Arm Explores Chip Development, Raising Strategic Questions

In a post-earnings interview with Reuters, CEO Rene Haas confirmed that Arm is actively evaluating a move into chip design, signaling a shift from its traditional licensing-only business model.

The company is “consciously deciding to invest more heavily” in creating chiplets and potentially full processors, Haas said.

While this move could help Arm cater to growing demand from cloud service providers (CSPs) and original equipment manufacturers (OEMs) looking for more integrated, AI-ready chip platforms, some analysts flagged it as a potential conflict of interest.

“This introduces execution risk,” noted one analyst during the earnings call. “If Arm starts building chips, it risks competing with its own customers.”

Currently, Arm provides architectural blueprints to nearly every major chipmaker—including Apple, Qualcomm, Amazon, and Microsoft—who use Arm technology to design their own custom semiconductors.

Strategic Partnerships and Future Opportunity in AI Infrastructure

Despite the short-term concerns, Arm remains positioned at the center of several longer-term opportunities.

• SoftBank, which controls around 90% of Arm, has expanded its licensing agreement with the firm.
• Arm’s CFO pointed to OpenAI’s $500 billion Stargate AI infrastructure project as a massive opportunity for custom chip designs.

“Stargate is looking to scale up over the next years,” said Child. “That’s a lot of compute and huge potential for lots of design opportunities.”

Second-Quarter Outlook and Market Guidance

For the upcoming quarter, Arm forecasts revenue between $1.01 billion and $1.11 billion, a range that aligns with consensus expectations but reflects continued caution around smartphone and end-user demand volatility.

Child added that because chip development has long lead times, Arm expects customers to continue investing during downturns, which could stabilize licensing revenue even if market conditions remain soft.

Solid Core, But Growth Headwinds and Strategic Shifts Create Uncertainty

While Arm remains a foundational player in the global semiconductor ecosystem, its over-reliance on smartphone royalties and possible shift into chip manufacturing raise important questions about the company's next phase of growth.

Investors will be watching closely to see whether Arm can balance its role as a neutral IP provider while expanding into high-growth AI and data center sectors—without alienating the very customers who built its licensing empire.