Arm Stock: Are Wall Street’s Tunnel Vision Traders Ignoring the Obvious?

Semiconductor darling Arm Holdings is having a moment—but are investors too fixated on short-term noise to see the bigger picture?

The chip beneath the hype

While analysts bicker over quarterly margins, Arm's architecture keeps powering 99% of premium smartphones. That's not market share—that's a monopoly with better margins than most SaaS companies.

Licensing vs. manufacturing: Why the Street gets it wrong

Legacy valuation models choke on Arm's asset-light model. No fabs, no inventory headaches—just recurring revenue from every AI chip designer betting on energy efficiency.

The AI tailwind no one's pricing in

Nvidia's Blackwell GPUs? Runs on Arm. Google's TPU v5? Arm. Qualcomm's Oryon? You get the idea. But sure, keep obsessing over whether earnings beat by 2 cents.

Arm's not just another chip stock—it's the silent landlord charging rent on the entire mobile and AI revolution. Maybe that's worth more than whatever discounted cash flow model your MBA intern cooked up last summer.

Image source: Getty Images.

Arm makes a big bet on the future

Arm didn't make any product announcements on the earnings call despite questions from analysts, but media reports have been trickling out about its plans for new chip components after finding success with Compute Subsystems (CSS), a more advanced starting point to build chips, which moves its design strategy beyond Arm v9 CPUs. On the earnings call, CEO Rene Haas said that CSS has "been successful beyond our expectations."

In an interview with The Motley Fool, Arm CFO Jason Child explained the evolution of the company's strategy from licensing its CPU architecture to now possibly designing its own chips. Child described the status of the product development as being far enough along that it's time to increase investment for things like lab testing, more complete design, and growing head count around those products. He called the investment "offensive spending," and said the company has a track record of turning this kind of investment into high-leverage revenue, as it did with CSS.

With this investment cycle, Arm is also responding to what its customers want. Haas said on the earnings call that newer customers and even traditional customers have "asked for a better starting point as they develop their systems on chips." By doing more of the design work, Arm can both charge more money for its product and save its customers valuable time bringing products to market, especially at a time when many of its customers are racing to develop artificial intelligence (AI) models.

Is Arm a buy?

On the one hand, the post-earnings sell-off in the stock is understandable. A 12% revenue increase, even with difficult comparisons, isn't particularly exciting, and a decline in profits tends to be anathema for growth stocks. Arm also trades at a lofty price-to-sales valuation of 42, showing high expectations are baked into the stock.

However, it makes sense for the company to advance its product strategy right now, when AI demand is soaring from all end users. Arm already has a unique competitive advantage in the industry with its battery-efficient CPU design, which gives it a clear edge in markets like smartphones and, increasingly, data centers. Building chiplets or even complete chips with that technology inside seems like a winning strategy, especially as Arm continues to take market share from the X86 design employed byand.

Investors will have to be patient with the current investment cycle, but it seems likely to pay off for Arm, given the strong performance of CSS and customer interest in more advanced products. Arm may not even have to take a product to market to reward investors. A simple announcement may be enough for that.

It's unclear when we'll get an update, but viewed in that context, it's much easier to look at the increase in R&D spending as an investment in future growth and a potentially transformative product, rather than just a headwind on profits.

Arm has the competitive advantage and strength of its Core business to take such a risk, and the success with CSS should lead to other wins. For long-term investors, taking advantage of the post-earnings sell-off looks like a smart move.