Arm’s quarter shows how it’s carving a lucrative path in the crowded CPU resurgence
Arm Holdings shares fell Wednesday evening even as the chip designer reported a better-than-expected quarter and offered an optimistic outlook for its data center CPU business. Revenue for the company’s fiscal 2026 fourth quarter, which ended March 31, rose 20% year over year to $1.49 billion; This was above analysts’ consensus estimate of $1.47 billion compiled by LSEG. Non-GAAP earnings per share (EPS) rose 9% to 60 cents, beating the 58 cents expected. ARM YTD mountain Arm Holdings YTD Arm Shares fell nearly 6% in after-hours trading, giving back about half of their gains in the regular session. We noted at Wednesday’s Morning Meeting for club members that this could happen, with big numbers and a possible pullback in the stock due to the pre-press rally. That’s exactly what happened. The stock closed at a record high of $237, and year-to-date gains have reached 117%. In Summary When we initiated a position in Arm at around $170 per share last month, we wanted to ensure our portfolio had exposure to the data center CPU market. Look, the artificial intelligence revolution has made great progress in the last six months. At first it was all about having the best graphics processing units (GPUs) for training large language models. The focus then shifted to inference, and now these workloads are evolving again, from managing human-generated requests to supporting continuous, agent-driven tasks. While GPUs still have a critical role in the future of AI, those once relegated to dead central processing units (CPUs) are having a big moment. This CPU renaissance was confirmed in Intel’s report two weeks ago. Intel CEO Lip Bu Tan said on the April 23 earnings call that the CPU-to-GPU ratio in AI racks used to be 8 to 1. But with the rise of factors, it’s more like 4 to 1, and could even mean 1 to 1 in the future. In other words, much more CPUs are needed than a few years ago. Advanced Micro Devices told a similar story on its earnings call Tuesday night. Measuring how much the CPU market is growing, AMD CEO Lisa Su said she expects the CPU server total addressable market to grow more than 35% annually, reaching over $120 billion by 2030. “Agents are really creating tremendous demand in the overall AI adoption cycle,” Su said in an interview with Jim on CNBC on Wednesday. It’s difficult for a stock to triple on the same information, so we’re not surprised to see Arm give back some of its recent parabolic gains. But we thought the post-earnings call strengthened our thesis. Arm-based CPUs account for more than 50% share among the top hyperscalers. AMD and Intel may claim they have the market share advantage, but Arm pointed out on the call that the three largest AI accelerator providers are pairing their chips with Arm-based ones. Nvidia’s Rubin GPUs are integrated with Vera (Arm-based) CPUs; Google has Tensor Processing Units (TPUs), which are Axion (Arm-based) CPUs, and Amazon has Trainium, which are Graviton (Arm-based) chips. All three are also portfolio names. “The largest and most common accelerators by volume, whether it’s Nvidia, whether it’s Amazon, whether it’s Google, are TPU, Trainium, and Rubin. … They all connect to Arm,” CEO Renee Haas said on the call. TPUs from Alphabet’s Google are co-designed by fellow club Broadcom. Why we have it Chip designer Arm is at the center of the CPU revival. The shift from training AI to running models has again increased the demand for central processing units. Arm has lucrative licensing and royalties for the chip architecture widely used by large hyperscalers. In March 2026, Arm announced the next chapter in its story: the company’s first on-premises data center CPU designed specifically for agency AI workloads. Competitors: Advanced Micro Devices, Intel Last purchased: April 20, 2026 Started: April 20, 2026 The biggest players in the AI space are increasingly choosing Arm-based CPUs over traditional x86 processors, an architecture dominated by AMD and Intel, for their performance benefits and greater efficiency. While Arm’s business model has traditionally focused on collecting upfront licensing fees and royalties tied to chip shipments, the new part of the story is the development of its own chip. Customer response to the ARM AGI CPU looks amazing. While introducing its first on-premises data center CPU at the Arm Everywhere event in March, the company said it has a view of more than $1 billion in demand over the next two years. It’s not even been two months and the administration has already doubled down on that view. They are currently seeing over $2 billion in customer demand through fiscal year-end 2027 and 2028. However, they tempered that optimistic guidance by stating that they were maintaining the initial $1 billion outlook as they needed to adjust supply chain capacity to meet demand. Concerns about these supply constraints caused the stock to give up its initial rise after hours. As we said when we first added Arm to our portfolio, the company has a great sales chart with its CPU. He believes hyperscalers could potentially reduce AI data center capital expenditures (capex) by up to $10 billion per gigawatt. Given the market’s focus on free cash flow, that’s it. The long-term target is still $15 billion by the end of fiscal 2031, and these sales are not expected to undermine Arm’s existing business, an important step back to the bear thesis. “The main reason we did this was because our customers wanted it. At the end of the day, we are responding to customer demand in a market,” Haas said, referring to developing its own chip. As a result, demand for Arm-based data center CPUs appears to be off the charts, supporting strong double-digit revenue growth for the foreseeable future. The story gets even better with the success of in-house chips, and now it’s up to management to navigate a tight and complex supply chain environment to exceed their goals. Given the recent parabolic move in the share price, we maintain our $250 price target and equivalent 2 rating. In the short time since we added Arm to the portfolio, the stock has gained approximately 40% in value as of Wednesday closing. If after-hours activity continues, we will refund part of the advance. But the rally in Arm shares our start on April 20, and in this regard, nothing incredible has happened in 2026. Commentary As for quarterly results, License and Other revenues rose approximately 29% year-over-year to $819 million, beating Street forecasts. These revenue streams come from the upfront licensing fee the company collects from customers who want access to its CPU architecture and designs. Royalty revenue rose 11% year-over-year to $671 million, but that actually missed what the Street was expecting. However, this gap was probably due to the smartphone market. This part of the business continues to grow year on year, but there is weakness in the end market due to lack of memory. More importantly, the company has seen accelerated use of Arm-based server chips by all major hyperscalers and increased deployment of data center networking chips. We were also pleased to see Arm’s gross margins and operating margins coming in better than expected. Arm’s current revenue streams consist entirely of licenses and royalties, creating extremely attractive gross margins. These rates were 98.32% on a non-GAAP basis in the quarter. (GAAP refers to generally accepted accounting principles. Non-GAAP, sometimes referred to as adjusted, removes one-time factors in the hopes of providing an apples-to-apples comparison from quarter to quarter.) Non-GAAP operating margins were also better than expected, and we should see more operating leverage going forward as cost growth slows from a 26% compound annual growth rate (CAGR) in fiscal 2024 to a mid-teens CAGR by fiscal 2026. From fiscal year 2026 to fiscal year 2031. Outlook Arm provides quarterly guidance. The company expects revenue of $1.26 billion plus or minus $50 million in the first quarter of fiscal 2027; This means a range between $1.255 billion and $1.265 billion. That’s slightly better than the consensus estimate of $1.25 billion, according to LSEG. (But that figure will be lower sequentially, as the fiscal quarter was $1.49 billion.) The company expects non-GAAP operating expenses to be $760 million, slightly higher than FactSet’s consensus estimate of $742 million. Non-GAAP earnings per share are expected to be 40 cents plus/minus 4 cents, implying a range of 36 cents to 44 cents. This is above the consensus estimate of 36 cents, according to LSEG. (Jim Cramer’s Charitable Trust is long ARM, NVDA, GOOGL, AMZN. See here for a full list of stocks.) When you subscribe to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trading alert before buying or selling a stock in his charitable foundation’s portfolio. If Jim talked about a stock on CNBC TV, he waits 72 hours after issuing the trading alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, TOGETHER WITH THE DISCLAIMERS. NO CIVIL OBLIGATIONS OR DUTIES EXIST OR SHALL BE RESULTING FROM YOUR RECEIVING ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULT OR PROFIT CAN BE GUARANTEED.
