While its fiscal Q2 results were mixed, its prospects remain bright.
Shares of Arm Holdings (ARM -3.74%) rose following its fiscal second-quarter earnings report as the company topped expectations for the quarter. The stock has nearly doubled year to date as of this writing, but is still well off the highs it set in this summer.
Let’s take a closer look at the semiconductor company’s most recent earnings and valuation to see if it’s time to buy the stock.
Strong royalty revenue growth
With Arm’s technology incorporated into nearly every advanced smartphone in the world, the company is just starting to benefit from the beginning of a smartphone recovery and upgrade cycle. Meanwhile, it is also benefiting from the increased adoption of its Armv9 technology, which carries a much higher royalty rate than its v8 technology. It can be up to double for Compute Subsystems (CSS), which helps with artificial intelligence (AI) workloads on edge devices and in data centers.Â
This helped lead to a 23% year-over-year jump in fiscal Q2 revenue to $844 million. Arm said that approximately 25% of its royalty revenue is now coming form its v9 technology compared to 10% a year ago.
License revenue, however, fell 15% to $330 million. The company said this was due to the “normal fluctuation in timing and size of multiple high-value license agreements. During the quarter, it signed six additional Arm Total Access agreements, bringing the total to 39. It also ended the quarter with 269 customers for its Arm Flexible Access program.
Overall revenue rose 5% year over year to $844 million, which was solidly ahead of its revenue guidance of $780 million to $830 million. Adjusted earnings per share (EPS) sank 17% to $0.30 but was above the $0.23 to $0.27 it had previously projected.
Remaining performance obligations (RPO), which is the combination of deferred revenue and backlog and an indicator of future revenue, jumped 10% sequentially to $2.39 billion. Arm said that it is seeing strong demand for Compute Subsystems, which is helping both licensing and royalty revenue. It also said its technology is now being used in data centers by the big three cloud computing companies, as well as in smartphone chips.
Arm maintained its full-year guidance of adjusted EPS of $1.45 to $1.65 on revenue of $3.8 billion to $4.1 billion. Analysts were looking for adjusted EPS of $1.56 on revenue of $3.97 billion, according to FactSet. However, for the second quarter in a row it lowered its royalty revenue guidance, saying it expects it to grow in the high teens. Last quarter, it talked about low 20% royalty revenue growth, while at the start of its fiscal year it was looking at mid-20% growth.
For fiscal Q3, Arm guided for adjusted EPS of between $0.32 and $0.36 and revenue of $920 million to $970 million. Analysts were looking for EPS of $0.33 and revenue of $939 million.
Image source: Getty Images.
Is Arm Holdings a buy?
This was a decidedly mixed quarter from Arm. It continues to gain solid traction with its new higher-royalty Armv9 technology with smartphones, while also making nice inroads in both the data center and in automotive.
However, continued weakness in the Internet-of-Things (IOT) space led it to slightly lower its royalty rate projects once again. Also, its v9 technology as a percentage of royalty revenue was flat sequentially, as there appeared to be a shift more toward mid-tier smartphones using older tech in the quarter.
That said, I would expect v9 penetration to continue to rise in the quarters ahead. The company has a number of big designs using this newer tech that are just beginning to ramp up, including Microsoft‘s Cobalt chip for the data center; MediaTek’s Dimensity 9400, the first Arm-based CCS chip in the mobile space; and Nvidia‘s Grace Blackwell chip that combines its graphic processing units (GPUs) with an Arm-based central processing unit (CPU).
                                                                                                                                                                                                                                                   Arm shares trade at a forward price-to-earnings (P/E) ratio of over 74 based on fiscal 2026 analyst estimates.
ARM PE Ratio (Forward 1y) data by YCharts
While the stock’s valuation is admittedly high, the company’s royalty and licensed-based business model deserves a premium, as once its technology is designed into a device it can often create a royalty revenue stream can that last a decade or even more. Meanwhile, it should be a nice beneficiary of AI moving forward, helped by a hardware upgrade cycle as well as its increasing presence in the data center.
Over the long term, I believe that Arm’s stock should continue to be a solid winner.
Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends FactSet Research Systems, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
