Arm's Q1 Earnings Meet Guidance, But Revenue Growth and EPS Guidance Raise Questions.

ARM reported Q1 earnings that met guidance, with $1.06 bln in revenue and $0.35 non-GAAP EPS. Revenue growth was 12.1% YoY, driven by a 25% surge in royalty revenue. However, next-quarter EPS guidance was weaker than expected due to higher operating expenses. The company is maintaining its $80 fair value estimate and sees the shares as highly overvalued. The narrative around ARM has shifted from being very strong to being mixed, with some customers shifting away from off-the-shelf licenses to custom core designs.

ARM Holdings (NASDAQ: ARM) reported its fiscal year 2026 first-quarter earnings on July 30, 2025, with revenue of $1.05 billion, slightly under the $1.06 billion estimate, and adjusted earnings per share (EPS) of $0.35, in line with forecasts. The company's royalty revenue grew 25% year-over-year to $585 million, driven by the accelerating adoption of the Armv9 architecture and the increasing number of Arm Compute Subsystems (CSS) chips shipping for data centers, automotive, and mobile applications [1].

Despite the strong performance, ARM's shares dropped 6% in pre-market trading on Thursday following the Q1 results and Q2 guidance. The company's next-quarter EPS guidance was slightly below the consensus estimate, with non-GAAP EPS forecasted between $0.29 and $0.37, compared to the consensus estimate of $0.35. Revenue guidance for the fiscal second quarter was also below the midpoint estimate, with a range of $1.01 billion to $1.11 billion, compared to the Wall Street estimate of $1.07 billion [2].

ARM's CEO, Rene Haas, announced that the company will increase R&D spending on AI initiatives and develop custom chips and chiplets in addition to its licensing model. This strategic shift could put ARM in competition with its customers, potentially impacting its licensing revenue [3]. The company's expansion into full-end solutions and the potential entry into the ASIC market presents execution challenges and may affect short-term profitability [4].

ARM's leadership in AI is amplified by a world-leading ecosystem featuring over 22 million software developers building on ARM, which represents more than 80 percent of the global total. The company's Compute Subsystems (CSS) are exceeding expectations, with new licenses signed and delivering higher royalty rates [1].

However, the smartphone sector's growth was slower than expected, impacting royalty revenue slightly. Additionally, ARM faces uncertainties in the macroeconomic climate, which could affect royalty and licensing revenues. Operating expenses are expected to increase due to accelerated R&D investments, impacting short-term profitability [4].

Based on the one-year price targets offered by 31 analysts, the average target price for ARM Holdings PLC is $144.74, with a high estimate of $210.00 and a low estimate of $76.54. The average target implies a downside of -11.38% from the current price of $163.32 [2].

References:
[1] https://newsroom.arm.com/news/arm-q1-fye26-results
[2] https://www.tradingview.com/news/gurufocus:600b03cbd094b:0-arm-holdings-arm-stock-plunges-after-disappointing-q2-eps-outlook/
[3] https://finance.yahoo.com/news/arm-holdings-reports-soft-guidance-213815593.html
[4] https://www.investopedia.com/arm-holdings-stock-sinks-amid-soft-profit-forecast-firm-may-make-own-chips-11782365