Arm Holdings once again demonstrated that its business is growing, but also that, amidst a heightened AI euphoria, market expectations are becoming increasingly strict. The British company — whose architecture design is present in a large part of smartphone chips and, increasingly, in AI-oriented servers — saw its shares drop around 8% in the after-hours trading on February 4th after releasing quarterly results where one specific detail overshadowed the rest: licensing revenue fell below Wall Street’s expectations.
This data point is not minor because licensing is the barometer of the future: the money received upfront when a client decides to invest in a new technological generation, enters into a more ambitious agreement, or prepares a product that has yet to hit the market. In the fiscal third quarter of 2026 (ended December 31, 2025), Arm generated $505 million from “licensing and others,” below the consensus of $519.9 million. The rest of the figures, however, were more robust: total revenue rose 26% year-over-year to $1.242 billion, and adjusted earnings per share stood at $0.43, slightly above expectations.
The impact was therefore more psychological than accounting-driven. In a market accustomed to companies related to AI exceeding and surpassing expectations, a $14.9 million shortfall in licensing was enough to trigger heightened scrutiny. This reaction reflects the current cycle phase: perfection is rewarded, and any nuance is punished, even if the core business continues to advance.
The paradox is that Arm’s strongest indicator of strength — royalties — hit record highs. Royalties grew 27% to $737 million, driven by the adoption of higher “per chip” value technologies like Armv9, and by increased use of Arm-based chips in data centers. This point is key: Arm does not sell processors outright; it licenses its designs and collects a fee each time a product incorporating its architecture is sold. When manufacturing and sales increase, Arm’s royalties increase as well. Conversely, when the supply chain slows, royalties suffer.
This is where the second concern weighed on the stock: fears that the smartphone market may lose momentum due to rising costs of critical components, especially memory. On the same day as the results, analysts and traders linked the licensing shortfall to a troubling message from another player in the mobile ecosystem: warnings that global memory supply tensions and high prices could cool smartphone sales and, by extension, the volume of chips that pay royalties to Arm.
The pressure is felt at the lower end of the market. The most affordable models have the narrowest profit margins to absorb increases in DRAM and NAND costs, and are also the most likely to feature configurations where any rise in raw materials translates directly into higher retail prices or forces a reduction in specifications. Although Arm attempts to reassure the market by noting that low-end devices generate less royalty per unit than premium products, the concern extends: if manufacturers sell fewer units, the entire supply chain cools; and if consumers delay purchases, renewal cycles lengthen.
Meanwhile, Arm is focusing on what drives its future: AI and data centers. The company emphasizes that its architecture is solidifying as a strategic component for moving data and enabling efficient inference—a critical attribute as operators seek performance without significantly increasing power consumption. In this context, Arm highlights the adoption of its designs in CPUs for AI-oriented servers, especially as the industry redesigns infrastructure to support large workloads while coexisting with GPUs and accelerators.
In fact, guidance for the next quarter was more optimistic than consensus predicted. Arm projected revenues of $1.470 billion for fiscal Q4 2026, with a margin of ±$50 million, ahead of the $1.440 billion estimated by the market. The management also indicated expectations for royalties to grow in the high teens percentage-wise year-over-year, and licensing to increase in the high teens as well. This suggests that, despite this temporary setback, Arm is not experiencing a structural slowdown, but rather a combination of timing, contract closures, and a more delicate mobile environment.
However, the market doesn’t only focus on the quarter. It also considers expenditures. Arm has acknowledged that its efforts to expand its role in the supply chain — including exploring more comprehensive designs and increasing R&D efforts — are raising operational costs. It’s the classic tension of a company seeking to capture more value: to increase relevance in an AI-driven world, it must invest, but each additional dollar spent on development becomes a friction point when investors demand “growth without added size.”
The upcoming event adds intrigue. Arm announced an event for March 24, without revealing details, which the market already interprets as an opportunity to recalibrate expectations: updates on roadmaps, new platforms, or messaging regarding its AI positioning. In an environment where even a tenth of growth or a major contract can shift the narrative, such dates act as catalysts.
For now, this episode offers a clear message: Arm continues to grow and set records in royalties, but the smartphone industry is passing through a sensitive period due to component costs and availability. Any sign of weaker future traction — like a small licensing shortfall — can trigger doubt. At its core, the market reaction does not question Arm’s relevance; instead, it exposes a more uncomfortable reality: in 2026, being relevant is no longer enough; one must be flawless.
Frequently Asked Questions (FAQ)
Why does a decline in licensing revenue impact Arm’s stock so much?
Because licensing often anticipates future projects: new agreements, adoption of more advanced architectures, and products not yet in the market. If this figure misses expectations, the market fears slower growth in the medium term.
How does Arm make money if it doesn’t manufacture chips?
Arm earns through two main channels: licensing (initial payments to use its technology) and royalties (a fee from each chip or device sold that uses its designs).
What’s the relationship between memory prices and Arm’s revenue?
If DRAM and NAND memory prices rise or supply tightens, manufacturers may sell fewer smartphones or delay launches. This reduces chip volumes in the market and can lower the royalties Arm collects based on volume.
Why is Arm so focused on AI and data centers?
Because these are high-growth markets where energy efficiency is crucial. Arm aims to expand beyond mobile devices, capturing demand in servers and inference workloads linked to AI.